United Microelectronics Corp (NYSE:UMC) Q2 2023 Earnings Conference Call July 26, 2023 5:00 AM ET

Company Participants

Michael Lin - IR

Chi-Tung Liu - CFO, SVP, Head, Corporate Governance & Company Secretary

Jason Wang - President & Representative Director

Conference Call Participants

Randy Abrams - Crédit Suisse

Brett Simpson - Arete Research Services

Charlie Chan - Morgan Stanley

Bruce Lu - Goldman Sachs Group

Szeho Ng - China Renaissance Securities

Gokul Hariharan - JPMorgan Chase & Co.

Sunny Lin - UBS

Operator

Welcome, everyone, to UMC's 2023 Second Quarter Earnings Conference Call. [Operator Instructions]. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour 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

Thank you, and welcome to UMC's conference call for the second 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 second quarter financial results followed by our President's key message to address UMC's focus and third 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.

Chi-Tung Liu

Thank you, Michael. I'd like to go through the 2Q, 23 investor conference presentation material which can be downloaded or viewed in real time from our website.

Starting on page 4. The second quarter of 2023 consolidated revenue was TWD56.3 billion with a gross margin at around 36%. The net income attributable to the stockholder of the parent was TWD15.6 billion and earnings per ordinary shares were TWD1.27. In the second quarter of 2023 the utilization rate was 71%, slightly up from 70% in the previous quarter.

On page 5 is quarterly sequential comparison of income statement. Revenue rose 3.8% quarter-over-quarter to TWD56.3 billion, mainly due to better product mix led to a higher ASP. Gross margin rate at 36% is also slightly better than that of quarter one, and reached TWD20.25 billion. We have been controlling our operating expenses amidst the current semiconductor downturn. So the current operating expenses in quarter two remained flattish at TDO5.7 billion compared to TWD5.78 in Q1 2023.

Operating Income reached TWD15.6 billion or 27.8% operating profit margins. Net non-operating income in the second quarter reached TWD2.8 billion mainly coming from expenses, interest and as well as some investment income from our affiliate companies. After income tax of TWD2.588 billion our net income attributable to the shareholder of the parent is around TWD15.6 billion or 27.8 percentage point. EPS was TWD1.27 in second quarter.

On page 6 is the first six months comparison. Revenue declined 18.4% to TWD110.5 billion and gross margin rate was around 35.7% or TWD39.4 billion. Net income in the first half of 2023 was TWD32.2 billion and net income rate was 29.2%. EPS in the first half of 2023 was TWD2.58 per shares.

On page 7 is our balance sheet at the end of June 30. Cash on hand is around TWD163 billion and total equity for the company is TWD326.9 billion.

On Page 8, as we mentioned, the blended ASP benefit from a better product mix, in a way it's also a lower utilization rate in 8-inch wafer capacity. So ASP in the second quarter reached up couple percentage point compared to the previous quarter.

On page 9 revenue rebounded for our Asian customers in the second quarter. And now reached about 56% of the total pie compared to 50% in the first quarter. And North America declined from 31% in Q1 to 27% in Q2.

On page 10, IDM declined slightly to 21% and fabless accounted for 79% of the total revenue in the second quarter of '23.

On page 11, the revenue breakdown by application didn't change much. Communication remained the same, computer remained the same. Consumer increased by two percentage point to 26%.

On page 12, due to newly ramped capacity becoming available in our P6 in Tainan Fab our 22/28 nanometer revenue continued to rise. Now it's around 29% of the total revenue. 40-nanometer is about 12% declined by three percentage point from the previous quarter.

On page 13 is our capacity, total capacity breakdown. We will continue to see some minor increase coming out of our 12A, our P6 expansion in Q3.

So the last page of my presentation is on foundry capital expenditure plan for 2023. For the time being still remain at $3 billion for the 2023 budget. So the above is a summary of UMC results for second 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

Jason Wang

Thank you, Chi-Tung. Good evening, everyone. Here I would like to share UMC's second quarter results.

For the second quarter we reported results inline with the guidance, with wafer shipment remaining flat on the previous quarter and utilization rate of 71%. Second quarter revenue grew 3.8% quarter-over-quarter, mainly due to improved product mix within our 12-inch portfolio. Revenue from 22/28 nanometer products continued to increase sequentially, representing 29% of second quarter sales. While contribution from specialty technology reached 59%. By segment, we sold short-term demand recovery in the consumer space for Wi-Fi, digital TV and display driver ICs while demand for computer-related products, also moderately rebounded from the previous quarters.

We are pleased to share that we have completed the transaction to acquire remaining shares in USCXM, our 12-inch fab in Xiamen, China, as one of the UMCS four 12-inch fat in geographically diverse locations. USCXM will continue to provide high quality fabrication service to customer and increase its contribution to UMC's financial performance as a wholly owned subsidiary now.

Looking into the third quarter, wafer demand outlook is uncertain, leading for longer inventory correction in the supply chain. While we saw a limited recovery in the second quarter, overall end market sentiment remains weak, and we expect customers to continue stringent inventory management in the near term. Despite a weaker than expected environment going into the second half, we believe our 22/28 nanometer business will remain resilient due to our strong position in leading edge specialty technologies, such as embedded high voltage.

In addition, we are gearing up to offer a necessary silicon interposer technology and capacity to fulfil emerging AI market demands from customers.

Now let's move on to third quarter 2023 guidance. Our wafer shipments will decline by approximately 3% to 4%. ASP in US dollar will increase by 2%. Rising costs will erode gross margin by low-single digit percentage point. Capacity utilization rate will be in the mid-60% range. Our 2023 Cash based CapEx will be budgeted at $3 million.

I conclude my comments. Thank you all for your attention. And now we are ready for question.

Question-and-Answer Session

Operator

Thank you, President Wang. And 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

Yes. Thank you. Yeah, wanted to ask my first question about the shipment outlook, and want to see if you expect at this stage for the decline to persist throughout second half. And then if you could split down by application, how you're seeing the auto industrial, and then for the areas that started to pick up, Wi-Fi, TV, driver IC and PC, how do you see that pickup sustaining? Or do you see those starting to correct now?

Jason Wang

Well, I mean, really on a higher level, given the overall softer end market demand while the post-lockdown, the recovery in China has being slower than expected and weakened macro conditions, where our customers are cautiously managing their inventory. And we expect the situation will likely linger into Q4. So mainly is inventory concerns.

So about inventory, while the end market demand has worsened compared to a quarter ago across a segment in smartphones, PC and server, the inventory will be slower -- slowly work off now. The pace of digestion is slower than we previously expected. At auto and industrial segment the demand of year-over-year projection at this time our projection shows remains unchanged from the previous quarter. However, the inventory level has picked up in Q2 for these two segments now. So therefore we will kind of cautiously observe the demand-supply situation now to determine when the semi-cycle was will start to improve or come back.

Randy Abrams

And that's helpful. So to clarify, it sounds like you said the pace of the inventory digesting because of weaker demand in smartphone, PT and server. That's -- I just wanted to clarify that's what you were trying to say. Like weaker demand that's keeping the inventory correction longer.

Jason Wang

That's right. In the segment of smartphone PC and server space, yes.

Randy Abrams

And for 28-nanometer, I think that node has been a bright spot and the ASP guidance seems to imply that's continuing -- could you update on your plan or your goal, I think to get utilization back up to 90%, 95% if that's still tracking and do you see the P6 continuing to get filled up as it comes in.

Jason Wang

Well, first of all for the P6 expansion, we expect our 28-nan trajectory is still on track at this point and we remain confident about the 22 and 28 nanometer as it will be a low intense lasting node or driving by many application across the 5G, automotive and IoT. And we have been focused on 22/28 offerings including many of the leading specialty and larger technologies along with our manufacturing quality and capacity offering now. So I think the 28 and 22 right now remains resilient.

And it's our projection now that 28 nanometer loading will remain at relatively healthy level and mainly supported by driver like I mentioned before the specialty technology and other larger technology like ISP, Wi-Fi and SOI processor.

Randy Abrams

For the expansion on track, I think the plan was 12k end of this year and then the rest of the 27.5k would that -- what is the timing? Would that be available through next year or any slowdown to move to that capacity?

Jason Wang

For P6, the trajectory is still on track. So there is no slowdown. And they are there are many mutually committed by both the customer and us. And given the current projection, now we -- our focus shows that 28 loading will remain at a healthy level.

Randy Abrams

The implication and if you could blend your 20 -- you have that capacity with LPA [ph] on top, I guess, supporting ASP, how do you net out the utilization, looks like now back to mid-60s. So with the excess capacity, how do you net that pricing environment, mature node versus the new capacity coming on, if the trend for you to manage to stable or do expect a bit more price pressure just with the prolonged inventory correction?

Jason Wang

Would that recede the pricing pressures? The blended ACH [ph] is more of a reflection of our loading between the 12-inch and 8-inch as well. So if we start off your question with the ASP and it's our belief when the when the end demand remains weak the pricing does not help to stimulate the demand. We are reflecting the overall foundry market dynamics and the pricing pressure while the UMC will remain our pricing strategy -- maintaining our pricing strategy, but we do work with our customers during the good times and the bad time to uphold their competitiveness and relevance in their respective market to secure their market share.

In addition, our value-added technology and quality and capacity alignment will support our customers their capacity to be competitive as well in their market position. So in the pricing space, we are respecting the market dynamics and the pressure, and we are closely working with our customer on that.

In turn the blended ASP, our LTA for the P6 on the 28 and there is non-LTA protected on 28 and there also eight-inch outlooks. So if we blend it together right now in Q3 the ASP is projected -- is going to be about low-single digit increase. In the forward looking we have to give a quarter at a time because that was subject to a different product mix.

Randy Abrams

Great. Thanks so much, Jason.

Operator

Thank you. This question is from Brett Simpson from Arete. Go ahead, please.

Brett Simpson

Yeah, thanks very much. I wanted to just come back to LTAs and maybe if you can discuss whether customers are generally sticking to these LTAs. And if not, can you maybe just talk about how you're resolving contracts with customers? Are you collecting penalty payments in recent quarters? Could you maybe clarify that? Any thoughts in terms of how you're managing through these LTAs given it's a sizable amount and your utilization is obviously coming down quite significantly from where it was a year ago or so. So any update there would be very helpful. Thank you.

Jason Wang

Sure, I mean, LTA is a mechanism to support both customer and us for longer term perspective, because we want to make sure the -- the customer want to make sure their supply is resilient, and we want to make sure that our investments are also somewhat protected, which is such a commitment. So LTA is the mechanism of that relationship. During the downturn cycle, we both have to look at this -- to revisit the situation, but under the framework of we still have strong confidence in our long term projections.

So they are some modulation or adjustments to be made during giving the LTA relationship. So they are resolving in some of the resolution with current LTA agreement. So that result in some the financial penalty related matter. But at this point it's still in a smaller session. I think we both, customer and us still have confidence in what have we aligned to do in terms of longer term. So we respect the market dynamics, and we will work with our customers in dealing with those challenges. But again, the LTA is something that we both respect and seriously commit to it.

Brett Simpson

Okay. Maybe just switching gears a little bit on the gross margin situation, and in the guide, obviously gross margins coming off a little bit from what resilient level in Q2? Where do you see the trough in gross margins for UMC as we go through this downturn? Do you think it will be -- your gross margins will trough in Q3, do you think it might -- the weakness in gross margin might extend into maybe early next year? Any thoughts in terms of depreciation as well, because it seems to be creeping up a little bit. Thank you.

Jason Wang

I mean, that's a multi multiple level of the consideration. One is the current market pricing pressure. The other is the recent rise in costs. For Q3, the rise in cost in electricity, high raw material, labor will impact our profitability. And we will continue to focus on action to mitigate those rising cost headwinds. We have implemented aggressive cost reduction activity to control the power consumption, productivity, manage productivity, manage the material cost and usage and streamline our process flow and labor management.

The smart manufacturing measures will also focus on technology improvements, such as continuous improvement process, CIP, optimize our fab productivity and quality to help mitigate those headwinds. So we will try to maintain our structure profitability level at a healthy level. But given the market current dynamic, we will probably giving -- we will be more appropriate -- prudent giving this margin guidance one quarter at a time. And once we're over the down cycle, then we'll probably can share a bit of a longer time perspective.

Chi-Tung Liu

Yeah, so the depreciation numbers for the 2023, we are still looking for a little bit over 5%, year-over-year decline. And for 2024 the increase will be more meaningful. But we again, we're up end the numbers up when we approach to the yearend.

Randy Abrams

Great, thanks very much.

Operator

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

Charlie Chan

Hi. Good evening. Jason and Chi-Tung. Thanks for the update. So my first question is actually about your 14- nanometer strategy or progress, because one of your potential partner has mentioned that there will be 14-nanometer AI ASIC demand and production could be in two years. So I'm just wondering that whether company is already prepared for the 40-nanometer demand and any more details about the capacity expansion, production timing, etc. We much appreciate it. Thanks.

Jason Wang

Our goal is always to fully exploit the DoD capability. And as we know the DOD capability can stand to the [indiscernible] technology. And having a successfully entering the mass production of our 22-nanometer business now and while we witnessing the steady rise in revenue contribution, we are actively progressing with development of the 12 things and specialty things based on the increase in 14-nanometer technology now.

So from the technology development, we are actively progressing. However on the capacity side, we still need to align with our customer for the capacity expansion and subject to our iJust vacation [ph] principle, which we have adopted years now. So once that's more clear, and we will update accordingly.

Chi-Tung Liu

Now just to add on to that, we do have 14 capacity already for years. So we have been producing some 14-nanometer crypto coin related products a few years back. So I think what Jason was referring to is more massive capacity expansion going forward. So currently we already have some 14-nanometer capacity already.

Charlie Chan

Okay, thanks for that. My next question is about your gross margin erosion in third quarter. I know that you mentioned about the cost increase from electricity or raw material. But I'm wondering, maybe this question is to Chi-Tung, do you do consider any dollars depreciation? I think I would think there is a kind of tailwind to your gross margin in third quarter. And also, I wanted to know what was the kind of impact from the pricing erosion. So can you give us some more details about, number one is the currency depreciation and secondly, the pricing pressure?

Chi-Tung Liu

For our guidance we did in factor in the currency fluctuation as a factor. So there won't be included in the couple of percentage erosion in our third quarter margin guidance, which is not included.

Charlie Chan

Okay.

Chi-Tung Liu

Yeah. As for ASP well, our blended ASP guidance is up by two percentage points. Of course, like-to-like it may vary according to different node. And it also get some kind of mathematical help due to the lower age wafer capacity utilization rate. So again, it's already reflected into our gross margin guidance.

Charlie Chan

Okay, Chi-Tung, when there is -- for every 1% point of the -- NT-dollar depreciation, what does it mean to your gross margin benefit.

Chi-Tung Liu

Is about 0.4% at this point.

Charlie Chan

Okay. Okay, thanks. Yeah, and the next is more focused on this pricing ability. So I think your peers more or less they already mentioned, some heavy pricing pressure instead. I can understand and I think it should be appreciated by customers that you want to support them to maintain their market position. But my concern is that more about the 28-nanometer, your pricing strategy because mentioned that your 28 nanometer utilization is still healthy. You still have those AMOLED ISP demand. So I'm wondering for 28 nanometer, are you also being flexible about pricing, because we keep hearing some of your customers talking about 28 nanometer you may have some compromise as well.

Jason Wang

Well, I mean, our pricing position understands to all nodes. Although the different node has a different circumstance or situation. But our position remains the same. We are maintaining our pricing strategy, but we do work with our customer, whether on a node-to-node or the holistic level. And given good time or bad time. I mean, the end goal is to help them and support them to be competitive and secure their market share. So it does not separated by different technology nodes.

Chi-Tung Liu

Okay, okay. So it's not just limited to the inch, is that right?

Jason Wang

No, I mean, is in general principle our pricing position and strategy, yes.

Charlie Chan

Okay. Thanks, Jason. So in that case, can you give us a sense, how much of your business is taking these kinds of flexible pricing? You think more than half of your business are being flexible about pricing in second half?

Jason Wang

I mean, it's hard to quantify that. And given the weaker end demands, I don't think any pricing changes will actually stimulate the end demand. It's mainly about within the pie, modulation between different players. So and we definitely look at that closely and working with our customer closely as well, and to support and make sure that we secure the share for both of us. And so it -- from a percentage or quantitative point of view is hard to give it off at this point?

Charlie Chan

Okay. Okay. Thanks. And lastly, maybe following Brett's question about the chart of gross margin, I am wondering your view about the pattern of the fab utilization. So third quarter, you see a sequential decline of UTR? Do you think that is the pattern of the utilization for this cycle?

Chi-Tung Liu

I mean, it's difficult to predict. And so all we can say, we current witness, the inventory, digestion, the slow pace, it's going to linger into Q4. I think that's all we can say for now. And we are certainly happy to give the gross margin guidance for the next quarter at the end of July.

Charlie Chan

Okay, okay. Yeah. So certainly we want to listen to your opinion. But my observation, is that your customers, although that demand is although that demand is outgrowing foundries sectors. So I do think the same inventory will come down. And don't forget that the channel inventory or downstream inventory is a present. So I'm optimistic. But anyway, we look forward to your next update. Thank you.

Jason Wang

Great to hear that. Thanks.

Chi-Tung Liu

Yeah, Thanks.

Charlie Chan

Okay, thanks.

Operator

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

Bruce Lu

Thank you for taking my question. I think to be honest, and we're still surprised about the capacity may not change and your schedule for the PC. It may not change. I mean, Jason seems to be -- you mentioned like confidence about where your customer. I think that's the case between investor and management. Can you help us like what gave you the confidence when you have a lingering fourth quarter and your customer cancel orders all the time? And you believe that you can maintain a high retention rate for 28 nanometer 0.4 to support the CapEx?

Jason Wang

I mean, first of all, the 28 nanometer's serving some of the important applications. And for the OLED driver, the current penetration in end market and the volume remains healthy. And in the ISP and the Wi-Fi space, we see new application continue coming into the space. So for the 28 given the broader customer base and diverse product line and product pipeline, that gave us the confidence because the outlook remains healthy and that's also equipped with our specialty technology leadership position as well.

So I think that differentiating us with other 28-nanometer capacity out there. Right now, given the market outlook, we have been very cautiously looking at it because the across all segments, the sentiment is weak. But what we have received, and what we have validated the end, what we have delivered right now, that has demonstrated the current broader customer base, and the product pipeline does give us that confidence that this will probably stay in a healthy level for some time.

Bruce Lu

So commit to something like your 40-nanometers, jobber lot, can we convert some of the 40 to 28? Or to save some CapEx or, what's the schedule for the Singapore new fab? Can we slow down a bit for that, even though it might not impact the CapEx for this year, but we can have a more conservative CapEx outlook for next year?

Jason Wang

I mean, we would definitely look at this. Right now for the P3, we expect it will go into volume production by mid-2025 as planned. So there's still kind of two years out. So we will monitor the overall market and align with our customer for the P3 ramp. Once we have a further update, we will advise accordingly.

And since most of the CapEx increase, now the P6 is pretty much done, and is more associated with the P3, and I think it's less affect our 2023 number. But it's a possibility that for 2024 number, we will continue to assess and update.

Bruce Lu

I see. Okay, so another thing, I want to switch gears to, you mentioned that you were doing some to the interposer [ph] business. Can you help us understand your strategy for this interposer? Business? What kinds of capital intensity, what kinds of returns and on the -- kind of -- do we need to expand the capacity for that? Has that been a bottleneck to impact your other business? Can we have more color on that?

Jason Wang

Sure. For the interposer, as a part of our advanced packaging space, we have been providing interposer and wafer to wafer outside bounding technology for years. So it's not something new. As the increased demand for higher bandwidth and gives smaller form factor requirements we have invested in the space and we will not be absent from those emerging markets. At the same time it's our strategy for this space to work with the OSEP partner, and to enable an open ecosystem.

So sort of we're only providing the interposer within the supply chain. And we're working with OSAP for the back end process. And so that's kind of how we position ourselves within this advanced packaging space. The interposer I mentioned earlier accelerating is really given the recent AI coverage we are just gearing up to offer additional capacity that's necessary to support the customers needs. And that capacity is associated with the significant interposer lot and the current capacity size is about 3,000. And it's our goal to double that capacity by mid next year.

Bruce Lu

Okay, just to be clear that you have no plan to invest in chip on wafer or other package matter, only for the interposer for this, is that correct?

Jason Wang

Chip on wafer means we are providing a wafer, certainly, yes.

Bruce Lu

Yeah, no, you're not going to provide any like bonding or chip on -- bonding to bonding on substrate that kind of packaging method. No, just for the silicon interposer. Is that right?

Jason Wang

Yes. But we do wafer to wafer bonding, hybrid bonding yes.

Chi-Tung Liu

Of course it's open ecosystem. So we want to leverage our partners for the downstream and it will be a total solution, but joint effort by our ODI ecosystem players.

Bruce Lu

What kinds of profitability and return profile for this business?

Jason Wang

Rather, I mean, currently given a size of this capacity and the space, the revenue contribution is still relatively small.

Bruce Lu

So how about a profitability

Jason Wang

Is aligned with our current corporate average?

Bruce Lu

Okay. So you saw it inline with the current corporate average in third quarter. You said your corporate average went down a lot.

Chi-Tung Liu

Our corporate average in quarter two was 36% gross margin, slightly better than Q1.

Bruce Lu

I see. Okay, so basically the interposer business is around that -- made 30% gross margin.

Jason Wang

It will not dilute our current corporate average, no.

Bruce Lu

I see. I understand. Thank you.

Operator

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

Szeho Ng

Hello, gentlemen. I have two questions. And number one, regarding the Xaimen fab. Right now it's 100% owned by the Group. So would there be any strategy change in our China operation or in our dealing with local customers there?

Jason Wang

I'm sorry. Again, the question?

Szeho Ng

The Xaimen. Right now the Xaimen fab is fully owned by us.

Chi-Tung Liu

Yeah, prior to the buyback is actually already dominant or controlled by UMC anyway. And of course, right now it's 100% owned. So there will be no minority interest, once Xaimen continue to make profits. And it's also our goal to see if there's any synergy we can generate between our two operations here in future and UMC in Xaimen to see any more synergy and also competitiveness by these two joint effort. But I think right now the domestic demand occupy even more percentage of their overall revenues.

Szeho Ng

I see. I see, all right.

Jason Wang

And whether it's a Xaimen facility, or our Japan facility they are one of our 4, 12-inch under the UMC group's global capacity scale, with each one of their unique manufacturing location, China, Japan, that will actually position us to support our broader worldwide customer base, and with UMCs overall comprehensive technology offering and at the same time, the UMCs worldwide customer can also access to those local manufacturing sites to serve the local supply chain. So we think the geographical located on those fab actually gave us that benefit as well as our customer to access to the local market. And 100% acquired before that it was the same position, that supporting our customer.

Szeho Ng

Okay, fair enough. And my second question on the gross margin. So right now we're guiding gross margin back to maybe mid-30s level. How easy for us for sort of the company to see the gross margin back to the mid to high-40s as last year?

Jason Wang

I mean, I think we kind of touched this similar question on a few different way. I mean, this current gross margin guidance is given based on the current outlook. Our product mix and the loading -- utilization projection and ASP assumptions. And given the rising costs, there are lots of factors that will affect the long term gross margin projections.

One way to look at this is if we look back, I think compared to UMC in the past, if we look at a similar loading situation, as well as the cost structure, I think we are much more resilient now, in terms our financial gross margin level, and going forward remains the same. We're going to take the same approach and continue focus on the control costs down, as productivity improvements, all the necessary measure against the pressure headwinds. And hopefully, we can deliver a much healthier, stronger balance sheet for the company.

Now since we are going through this accounting [ph] cycle now, and it's more appropriate and prudent that we don't give out any long term projection at this time. And when it's more ready, and we'll definitely share that with you.

Szeho Ng

I see. Okay. All right. That's one, and just to update the industry outlook for the year, addressable market that we are serving.

Jason Wang

Of the semi outlook, we expect the 2023 semiconductor market, exclude the memory will declined by mid-single digit year-over-year. For the foundry we now expect the industry will decline by mid-teens year-over-year. With the weaker macro condition we'll need to be very conservative as our customer continue to manage their business, and inventory now. For our addressable market I think we'll be higher than the mid-teens, actually the decline will be higher.

Szeho Ng

All right. Okay, fair enough. Okay, thank you gentlemen. That's very useful.

Operator

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

Gokul Hariharan

Yeah. Hi, thanks for taking my questions. My first question, I just wanted to ask a little bit more on the pricing strategy and what you're seeing from price pressure. Are we starting to see more price pressure coming through for your China facilities given we hear about a lot of foundry price pressure in China, given that UMC has significant capacity in Xaimen and HeJian? Is there bigger price pressures you're seeing for your Chinese capacity, or is it a price pressure that you're seeing across the board for the company itself?

Jason Wang

It's across the board, is -- given the current market condition, and I think we've seen pricing pressure across the board, not only from China factory.

Gokul Hariharan

Got it? And we do hear that many of your existing clients are considering using some of the Chinese foundries at least for a portion of their future products. How do you see the China capacity build because that seems to be the one area where there doesn't seem to be any pause in capacity build out. Still seems to be pretty aggressive among all the Chinese foundries for primarily mature 12-inch given they cannot really build leading edge. So how do you expect this to kind of interact with the, like price discipline that has existed in the non-China part of the market, including you guys and some of your peers over the next couple of years?

Jason Wang

Well, I mean, first of all, I mean, without commenting about the peers, for UMC to stay competitive and remain relevant in our industry, we have established several advantage in our view for many years. One is the comprehensive specialty technology offering. Two, the competitive world class manufacturing quality and our geographically diversified manufacturing sites.

In addition, our strong commitment, bringing this company to improve our customer relationship and ESG commitment, we believe will further enhance our position more than short term foundry partner. That's more on a higher level. And on a technical levels, we look at the major overlap area in the 8-inch. We have been improving our 8-inch customer stickiness, by aligning with our customers on their products back to the [indiscernible] years specialty technology, including process customization, JDP, the joint development program for products such as analog, power management IC, MCU, and discrete devices.

And so we are confident to navigate through this current market condition, as well as the competition landscape. I think there's many areas that we need to do, but we do believe that we have several advantages in many areas. And we definitely have deployed those initiatives. And hopefully we can navigate through this.

Gokul Hariharan

Okay. Thanks, Jason. Maybe one other question. I think you have consistently mentioned over the last few quarters that cutting price or offering price discount in a downturn doesn't really work. Now as we think about potentially going into next year, emerging from the downturn, do you think that's when we start to see a little bit more price aggression, given a lot of your peers as well as you would be running at lower utilization? Is that when we should start to expect a little bit more price aggression in this industry?

Jason Wang

I mean, obviously, we all know, right, I mean, the price pressure is there. And our comments really about the pricing doesn't help to stimulate the end demand. So when the end market is shrinking, the overall expense is shrinking. The pricing is mainly for the tactical level approach, and which we will use. We will not ignore that. And we are, like I said, we respect the overall foundry market dynamics, and those pricing pressures.

So we will be with our customer, for those to help uphold their competitiveness and secure their market share. And on a pricing strategy level, and we remain clear about how to manage those, in a several level of whether it's a strategic level, or tactical level, or the short term or longer term structure. So those strategies, we made no change. But we will definitely use those as we come to more of a technical purpose. And so we're not ignoring that. We would just want to managing the pricing prudently.

Gokul Hariharan

Understood. Maybe one question on 8-inch, it's been kind of seeing very low utilization across industry. Do you feel that that's going to turn around sometime soon, or there is a situation in the market where more and more 8-inch product is getting converted into 12-inch and as a result, this overcapacity situation could last for a very long period of time?

Jason Wang

I mean, for the long run, we will see some 8-inch demand will recover, post-inventory correction. There will have some. They are also new applications from megatrends such as EV, plus increasing IDN outsourcing business, which will help lift the 8-inch loading. However, like you said, we do anticipate continuous pressure from the 12-inch mature nodes that has impact the 8-inch supply chain. So they will have some recovery and from the overall market once the post-inventory correction, as well as the new application ramp. But I think what you mentioned about has also happened there. So they will have some impact as well.

Gokul Hariharan

Okay, thank you very much. Yeah. Thanks.

Operator

Next one, Sunny Lin of UBS. Go ahead please.

Sunny Lin

Hi, good afternoon. Thank you for taking my questions. So my number one question is on passing for your local agreement, especially for 20-nanometer. So as you said, given the ongoing demand trend, please, I wonder for your LTAs for P6, and the future Singapore expansion, are you seeing any pressure from clients to negotiate under contract pricing? And the second part of that question is for your Singapore fab, if you look at the cost, how much higher is it versus the P6 expansion in Taiwan? It will not be reflecting to your pricing for contract as well.

Jason Wang

For LTA, I answered earlier that our customers, as we do that seriously, and at this point the changing on those LTAs vary in amount, they are relative small. Between us and the customers we do look at that is for more of a long term perspective, not a short term tactical mechanism. So we still feel confidence about those LTA going forward.

There are pricing discussions, but not associated with LTA. Even with some of the LTA revision that will be very, very small portion, relative small. The cost increase in Singapore is definitely much higher not just because the geographical reason, also because of the continuous inflationary costs increase. So we know that at this point we don't foresee that will stop anytime soon.

We have to mitigate those headwinds, and continue working with our customers to mitigate those and the same time be transparent about the cost increase. And to deal with that issue together. The same time, we have to be realistic about the market price. So it is a balancing act. And we'll continue manage that throughout this whole process.

Sunny Lin

Got it. And so just to make sure that interpret currently, so given the cost the funds, we'd be fair to assume that you could be pricing differently for your 28-nanometer capacity in Taiwan versus Singapore?

Jason Wang

So for the market price, they will not price differently. The market price reflects the current market situation. And it is usually not a cost based topic. Really this is more of a joint investor program. And the cost is more of the factors, but if we are talking about the market price, it's not based on the cost basis.

Sunny Lin

Got it. Thank you. That's very helpful. So my second question is about the structural supply versus demand for growing that foundry. If we look at your historical utilization rates full cycle that will be between, I think 85% to 90%, so cycle but apparently in the last two years, the industry capacity has increased quite a bit. So just want to get your thoughts on how we should see about the cycle utilization rate for you, maybe for next two to three years.

Jason Wang

Well, I mean, from the business management point of view, we also want to help increase our utilization and help lower our fabs. So I mean from a financial model standpoint, and the company's balance sheet healthiness level and the resilience, we will probably have to plan out different scenario. But as a business manager, I probably won't tell our team to shoot for 80% or 90% utilization as our goal. So from the financial simulation purposes, we have a different layer of utilization rate assumption, and to examine our financial resilience. But in terms of the business objective is our goal to fully loading our fab.

Sunny Lin

I see. So I guess -- several I know have asked the demand question from a different angle. But just want to try one more way here. And so I understand we are still through the cycle trough, visibility is still not high. But as Charlie pointed out, the MSE inventory continue to drop. And so, will there be good possibility that we could potentially see a more meaningful recovery from next year?

Jason Wang

I mean, I certainly hope so. And I'll also expect that that's the case. So I was glad to hear what Charlie mentioned. And we will closely monitor the market dynamics. And right now, we do see the inventory correction lingering into Q4. We haven't seen any meaningful demand recovery yet. Hopefully, a quarter older, and we will have a better view and better comments. But at this point, we do think this inventory situation will lingering into the Q4.

Sunny Lin

Got it. Thank you very much.

Operator

Thank you. Next one is from Brett [indiscernible], Bank of America. Go ahead please.

Unidentified Analyst

Thank you for taking my question. So I have two questions. First one is pretty sure, it's 65 nanometer. So we see -- we saw the 65, as the mix increased from 19% in 1Q to 23% in 2Q. What was the driver behind and should this trend continue in the second half? That's the first question. Thank you.

Jason Wang

I mean, our 12-inch loading is still above our corporate average. And we don't comment about the loading by node. And I can share with you the 65 loading in Q2 is increases is mainly coming from the automotive segment.

Unidentified Speaker

Got it. Thank you very much. And then my second question is on the advanced packaging. We would like to learn UMC strategy and development advanced packaging we have learned from Faraday’s [ph] earnings call yesterday, its collaboration with UMC on advanced packaging, multiple angles. And we also understand interposer and wafer to wafer bonding, and the current focus of the firm, how fast do you expect it to grow? And do we have any incremental CapEx plans on it?

And also, what are the upcoming offers on top of those that can help UMC capture the upside from the advanced packaging? Thank you.

Jason Wang

I do think because the higher bandwidth and reduced form factor, are the two major driver for this advanced packaging. But they are for different applications. Usually, the higher bandwidth more for the AI processors. And the form factor is for some of the integration, wafer to wafer integration level to help in the form factor.

So there's a different application. So it's important that UMC is not absent from those applications. We do see the market demands increasing. And we've seen there's going to be multiple application coming in. So we want to make sure that we have the technology to serving those markets. And so that's why we have been developing this and providing this interposer and wafer to wafer bonding technology for years now.

The strategy, also about the ecosystem, we're working closely working with all fab partners for the back-end process. And we are also working with the design services company and about the integration, the wafer level design. So they are considered as a part of the ecosystem. Right now, we think this is in the early stage of the production ramp. Technology has been there for years, but the volume production has really just happened with the recent AI momentum.

But that's more on the data side, the high bandwidth data side. For the form factor side I think there's other pipeline coming in the next year. So we haven't really seen meaningful or high-volume production yet. The CapEx spending on those space is already planned in our budget is not changing our overall CapEx number is embedded in that in that number already. So, we think it's not to the level that we need to revise our CapEx to support this.

Unidentified Speaker

Got it. Thank you very much. Just one very quick follow-up is on the so called open ecosystem. And obviously, we are seeing a closed system, which currently dominates the market. So could you please provide some insights into the optimal collaboration model? Additionally, what may be the preferences of their clients in this regard? Thank you.

Jason Wang

I think the concept is important to provide what you are relevant with and advanced packaging in our view is considered wafer level integration technology. And that's where we're going to be focused on. For the back end, because the back-end substrates, there will be partners in our ecosystem providing that.

The back-end packaging technology also have a provider service. We don't have much of a value there. So that's why we stick with the wafer level and silicone level integration focus. So and so that's how we position ourselves and ensure that we will be indispensable position, because the wafer level integration has to be done in a wafer with a fabrication fab. But others we don't have to. So that's why we had to pick the space that we are more relevant.

Unidentified Speaker

Got it. Thank you very much for the color.

Operator

Thank you. Ladies and gentlemen, 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.

Michael Lin

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.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for 2Q '23. 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 investor's event section. You may now disconnect. Goodbye.