United Microelectronics Corporation (2303) Earnings Call Transcript & Summary

Welcome everyone to UMC's 2022 Second Quarter Earnings Conference Call. [Operator Instructions] This conference call is now being broadcasted live over the Internet. Webcast replay will be available within 2 hours after the conference has finished. Please visit our website www.umc.com under the Investor Relations, Investors Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. And Mr. Lin, please begin.

Thank you and welcome to UMC's conference call for the second quarter of 2022. 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 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 Investor 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. Chi-Tung Liu, to discuss UMC's second quarter 2022 financial results.

Thank you, Michael. I would like to go through the 2Q '22 investor conference presentation materials, which can be downloaded or viewed in real times on our website. Starting on Page 3, the snapshot of our operating results. Our utilization rate in quarter 2 was still over 100% plus and revenue reached TWD 72 billion I think -- I believe this is a record high. And EPS is TWD 1.74 for the second quarter compared to TWD 1.61 in the previous quarter and also TWD 0.98 in the second quarter of last year. Next page please. For our quarter-over-quarter comparison, revenue growth 13.6% to TWD 72 billion. Gross margin rate increased to 46.5% from 43.4% in the previous quarter. And operating income is TWD 28.1 billion or 39.1 percentage points. Net non-operating income is a loss of TWD 2.58 billion mainly due to the weakness in the capital market and UMC's investment portfolio was mark to market and that's a majority of the TWD 2.5 billion loss in the second quarter of 2022. And net income reached TWD 21.5 billion or the equivalent of EPS TWD 1.74 in quarter 2 of 2022. Next page, please. For the cumulative performance for the first 6 months of the year, revenue reached TWD 135.4 billion which is an increase of 38.2% year-over-year, and this is in the NT dollar currency. Gross profit is TWD 60.9 billion period or 45% gross margin rate, and operating income reached over TWD 50.4 billion and operating margin of 37.3%. And for the EPS of the first half of the year it's TWD 3.35 compared to TWD 1.83 in the same period of 2021. Cash before our dividend payout was TWD 183.7 billion by the end of June this year and total equity for the company is around TWD 283.2 billion. For our 13.8% revenue growth in the third quarter -- or in the second quarter; 3 factors. Both the AP and wafer shipment include -- as well as the NT dollar depreciation all contribute to our revenue growth in the second quarter. And the factor is roughly 1/3 of the growth rate each. So that reflects in our ASP growth in second quarter of 2022. In terms of revenue breakdown, the ratio remained similar between quarter 2 and quarter 1. IDM increased slightly in second quarter to 43%. And the segment breakdown, again, remains similar to Q1, where we see some minor decrease in computer in actual dollar terms all segments see a growth in the second quarter of 2022. We have new capacity available in 28 in the second quarter that helped our 28/22 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 2, our 12A has a more meaningful IC growth which is paying pay a new capacity came online in the beginning of quarter 2. For quarter 3 overall capacity compared to quarter 2 there's only a very minor increase in terms of quarterly capacity. And for CapEx, well, here on cash basis, it remained around $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 2, 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, Mr. Jason Wang.

Thank you, Chi-Tung. Good evening everyone. Here I would like to share UMC's second quarter highlights. In Q2, we delivered a result in line with guidance, thanks to continued strong demand for UMC's differentiated processes 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 lifted 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 system, which now represents 22% of UMC'S overall wafer revenue. And has demonstrated solid traction for OLED display drivers, image processors, Wi-Fi and automotive applications. As the structural strength drives semiconductor content increased in end devices from smartphones to automobiles it is our conviction that 28 nanometer it is a long lasting node that will be important for many existing and emergent applications for years to come. Going into the third quarter we expect our business to remain firm while cooling demand for smartphone PC and consumer electronics may pose some short term fluctuations we are actually working with customers to adjust their product mix. Coming off a super cycle over the past 2 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 macro environment. Now I'd like to move on to third quarter 2022 guidance. Our wafer shipments will remain flat. ASP in US dollars will remain flat. Gross profit margin will be in the mid-40% range. Capacity utilization rate will be at 100%. Our 2022 cash-based CapEx will be budgeted at USD 3.6 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wang. [Operator Instructions] And our first question is coming from Randy Abrams, Credit Suisse.

I wanted to ask a question just on your outlook, where you mentioned the inventory correction starting in some of the applications. Could you give a view how you're looking now on just steepness or type of correction you're seeing if you expect a period of underutilization. And TSMC was giving a framework, they expected to surpass. But if there's a feel for inventory, how long it may take. So just wanted to get a perspective of how you're viewing the next few quarters.

Well, okay. So already, we have observed the customer outcomes in general that we are aware that inventory level is in a relatively high in certain segments. However, it will be hard to predict how long it will take to digest the semi inventory under the macro economy uncertainty. So we will closely monitor the current situation and respond to the changes in customer forecast accordingly. The -- while we saw -- while we observed the softening demand in the smartphone, notebook and consumer section, the others in the segment, the networking, industrial, auto, it actually has a more stable demand. So again, there are some observations about inventory concerns. And -- but we have foreseen some -- our Q3 loading will be 4. And for the Q3, we will continue monitoring the market outlook and probably report that in the next conference call.

A question on third quarter for the shipments flat. I know Chi-Tung mentioned not much capacity coming online. Is it that you're constrained shipping more or because of the inventory correction, it's already limiting ability to get some seasonal or some increase. And then I'm curious to your view on the pricing environment. There's been -- the market talk about start of some discounts, but how you're seeing outlook for pricing?

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

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. You -- 2 parts to it. You talked about existing and new applications. If you could give a flavor, the new applications or 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 all 28 -- and given the environment, you still see that fully committed?

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

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

Yes. I mean we do expect the P6 ramp-up started from June '23, mid next year. And right now, it's thanks to our fab effort. By the way, the lead time is actually stretching out. But thanks to our fab effort to minimize the 2 delivery impact. Our current ramp will remain at the June 23, next year, June -- mid next year. And all this P6 ramp is acted by the LTA arrangement. And we still believe the LTA is a good mechanism because it presents the mutual commitment for both customer and UMC to secure our future growth.

And just one last, if you could give an early framework the spending for next year, we're -- it's probably partly that and then partly Singapore. And if you -- I guess just looking at the macro uncertainty and the downturn, like how firm do you see schedule? Like would you consider push out your delays if the macro looks sharper and the slowdown?

Well, I mean, for CapEx, we maintain confidence in the industry's megatrends for long-term growth. And our CapEx decision was based on market and customers' endorsement together with a disciplined ROI-driven CapEx strategy we have adopted a few years ago and with a billing affordability. And the capacity expansion in 12A P6 and the current 12I P3 conversation and our competitive -- the depletion specialty 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 impact our long-term plan at this moment.

And next, we'll have Brett Simpson of Arete Research.

Jason, I wanted to just talk a bit about CapEx. Looking at the first half of this year, you spent a little less than USD 700 million, and you've maintained your spending plan this year at 3.6%. 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, you were 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 all in 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?

Yes. For CapEx spending, according to the current schedule, it will be rather second half cases. 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.

So going to your question about the current segment outlook, we did maintain a healthy loading for both Q2 and we foresee that we will maintain healthy loading for this year. And because with the steady demand from auto, industrial, server and networking segment, I mentioned earlier. However, we do see some of the other segments as more of a weaker segment in the communication, consumer and computer area. While they can be offset by the stronger segment that maintained the full loading at the same 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 controllers as well as the MCU. So there are many applications that remain strong in the subsegment of the consumer. So within each segment there are stronger and there are some weaker sub-segments. 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. So for the Q3, we probably see more of a decline in percentage in the consumer as well as computing but be compensated by the auto and communication I touched earlier.

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 I'm 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?

Okay. So first is about the costs up, right? In light of the rising costs contribute to raw material, utility and labor rate, we do observe that. And the company's actually -- to offset those headwinds with continuous cost reduction efforts through mix optimization, productivity improvement. So we are doing our best to continue offsetting that. But from the ASP standpoint, we -- there's a couple of layers of consideration. One is on the ASP positioning, we -- the ASP usually, in our view, reflects our relevance in the supply chain. And while UMC continue to enhance our value proposition to our customer, not only based on the demand supply dynamics, and we usually position that's how we view the ASP position. In light of the higher inflationary costs throughout the supply chain, we -- like I said, we are not immune. So therefore, we will cooperate with our customers to navigate the headwinds in conjunction with our internal cost reduction effort. So yes, we will be very transparent with our customers about the cost increase, and at the same time, we will work with them closely to address that issue.

Next question, Laura Chen, Citigroup.

I'm 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 for maybe future migration for 14. So just curious, given the expansion we have continued in 20 and 22, but do we have any plan for any like a future potential migration to FinFET?

Well, our FinFET our 14 FinFET entered production a few years ago with some limited customer. And however, our future capacity plan will still depend on the market and consumer demand outlook. The plan remains unchanged at this point. And while we actually focus on addressing the strong demand of other nodes. So we will continue making progress on the FinFET but on the capacity deployment point of view, it does have a lower priority compared with the other node at this moment. Again, this has to realign 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 road map, but the significant -- the capacity deployment plan is not in the near term yet.

And another question I have is about the specialty process. Can you give us more color about what are you exactly offer in the specialty process? And how big is that account for your revenue? And can it also be kind of supported for the ASP, et cetera?

Well, I mean the -- our specialty technology is representing about 50% to 55% of our revenue today. And it is a direction that we continue marching, and we are making some significant progress. And while we continue delivering the advanced specialty technology, for instance, in the 28 nanometer, we have delivered a first high-voltage solution, and we also continue delivering the BCD technology in 55 and RF SOI in the 55-nanometer as well. Those all consider a 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 to the -- from a specialty is right on track what we planned.

Next question, Szeho Ng of China Renaissance.

I have a few questions. I had the first one regarding the long-term agreement. Given the fact that there are some soft patches in the consumer electronics smartphone market, I'm not quite sure about the enforceability of the LTA on the existing capacity right now.

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

Right. Right. Will we be considering to relax some of the terms?

Well, first of all, LTA is a major commitment from us and for both customer and UMC. So we have certain obligations as well. And the objective is to try to secure future growth for both. And both parties right now have treated this LTA agreement very seriously. And despite the recent market downtrend, we have observed that customers are bringing in pooling orders with us to honor their contractual commitment. So yes, we have started to recognize some of the customers' penalty due to some -- the fail to meet the original terms. However, that's still a very minimum compared to the current size of the LTAs.

And then for the quarterly guidance, we are guiding for [ top line ] to become flat. I'm not sure if we can comment a little bit on the monthly linearity here.

Yes. We cannot comment on the monthly trend. The uncertainty has increased. But we are confident about both the capacity side, as I mentioned, only grow very marginal, almost no change, but it will remain at 100% loading. So shipment-wise, it should be flat. ASP-wise the outlook is firm. So we are also confident about our ASP. The only uncontrollable part is the ForEx. And certainly, we are building some software for that. So that's about the fundamental assumption for our outlook.

Chi-Tung, maybe the last question from my side. Regarding the other operating income line, yes, I think that's referring to the technology licensing to UMC [indiscernible], right? Just wondering how long it would last here? Actually, I asked this question a few quarters back, but I just want you to provide a…

So that's mainly the subsidiaries from the -- no, subsidies from the local government and money already in the pocket. And the accounting book recognition wise, as [ OIE ] is through the -- that's along with the equipment depreciation schedule, which normally 6 years. So it won't go away until our depreciation expenses start to fall off. So it's really the whole point for getting a subsidy for the depreciation period.

Along with that…

Sorry?

Along with that end -- I mean, the…

Maybe another 2 years.

Another 2 years from now?

Yes.

Next question, Sunny Lin, UBS.

So my first question is that I wanted to get your current view on the supply-demand outlook for tooling at foundries, obviously, now outlook is pretty different from the start of the year. And then which part of the trailing edge may see more oversupply risk into 2023 and 2024 based on your current analysis?

I mean the -- for 2020 -- let's start with the 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 a healthy loading. I reported our guidance in Q3 will be fully loaded, 100% loading. And in Q4, we still believe that we can maintain a healthy loading, while the pricing will remain firm. And as the detail, we will provide an update in our next quarterly conference. Going into 2023, even the rising macro uncertainty continues and higher inflationary cost pressure, we foresee the foundry industry growth in 2023 will be more moderate. And for UMC in 2023, without commenting other peers, we are excited about our P6 capacity, which impacted 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 fore mentioned fundamentals, we -- our goal is to position ourselves to hopefully deliver another good year. I think the overall -- the capacity increase, I think will probably be affected by some of the 2 lead times and also the macro environment. So those capacity expansion in 2023 will probably likely slow down. But I think if your question is about beyond 2022, it will be probably too far out at this point.

And so the 5% capacity increase in 2023. How does that imply for your capacity increase from P6 by end of next year?

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

And then I have a second question. For your 28-nanometer, I understand you may have quite a bit of order backlog from the 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?

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

Next question, Charlie Chan of Morgan Stanley.

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

Sure. We touched the LTI earlier. Like I said, we -- both our customers and us treat this LTA very seriously. So I think we're working very closely to navigate through this contractual obligations. So at this moment, I think we've honored the 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 actually continue because there is compensation and discussion in our P3 conversation. So it's in our projection, our LTA number actually is going upward, not downward even with some -- the recent headwinds from some of the segments, like you mentioned. Going back to the ASP pressure, 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 guiding the Q3 with the first ASP projection as well as the full loading result projection. So we have to counter what the market is, but not at this current point, our ASP will remain firm.

But I guess my problem is that I understand you try to sell the value, right? But if you look at, again, the LCD driver 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, their margins are shrinking. So if that is the case, I really concerned that customers may need to choose lower cost foundry capacity. It's not just limited to LCD driver IC but also PMIC other commodity sector. So what would be your reaction? I know this year could be fine, but next year, if there's a commodity capacity, your industry peer's prices on average 10%, 20% below yours, what would be your strategy?

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 steps to significantly enhance our customer stickiness through highly differentiated and customer process solution, referring to your specialty technology for instance. And along with our manufacturing capability to enlarge our preferred source with a global leading customer, along with the LTA for our long-term mutual commitment across very diversified market segment. So during this downturn, the cyclical downturn, we will be able to minimize the business impact through one adjustment through various market segments. If there are some weaker segments and we hopefully will be able to compensate it through a stronger segment. Some of the single source or product, we actually work with customers through approving modulation. And in some of the multiple sourcing, we actually do -- we do gain foundry share as well. So while we're executing those, we can help our loading maybe through this cyclical period. And hopefully, we can continue maintaining a very healthy loading. So they are -- we have to address this fundamentally. The -- with the diversified customer portfolio and aligning to a megatrend usually can help us to mitigate that to a certain extent. And I understand they're going to be challenges for some segments, but hopefully, that if within our own capability will support us to our max. But at 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 definitely is not our goal to continue on that path. So we are executing our plan set out a few years ago. And while the downturn comes, and we will exempt those results? And maybe if there's more development, we will update you in the next quarter.

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

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 6 projects coming along, which is total cost is about TWD 5 billion to TWD 6 billion. And for Singapore, the P3 is also another TWD 5 billion also. So these 2 projects alone is around TWD 10 billion and it's going to spread out in this year and the following 3 years, something like that.

And server chip, what kind of server chip are you making, may I know some prototype?

Again, I didn't quite get that question.

Server. Yes, because, Jason, you mentioned that the server networking or kind of a strong segment that can offset the consumer weakness. So I'm just curious about server chip because I think they include DRAM, CPU, some higher networking. But I just don't want to realize you have exposure to server segment as well.

It was the companion this within the server sector. So it's more a subset of that..

And as Laura asked about the 14-nanometer FinFET. That is also one of the key feedback I'm getting from the U.S. investors. They are concerned about your long-term developments. They are very happy with your execution, your strategy on the CapEx discipline. But talking about the future, do you think about your 14 nanometer FinFET structure is competitive from a technology perspective. Because 20-nanometer, UNC is very famous poly-SiON, right, very competitive. But FinFET, do you think that there is going to be competitive as well? We are not talking about just purely from a technology perspective.

Well, it's our belief that our solution will be very robust and competitive. And in 28, it's actually not just poly-SiON it's actually both poly-SiON and High-K as well as the 22 nanometer because they are in there. But for the 14 FinFET we also believe that we can deliver that. And 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 but it's in sequence of the priorities.

Next question, Gokul Hariharan, JPMorgan.

First of all, Jason, I think you were kind enough to talk a little bit about next year's outlook. Do you are working -- are you working with the assumption right now that the foundry industry will still be growing next year? Or you think that we move -- have a decline like we have had in the past down cycles when semiconductor industries go through a down cycle, foundry industry also declines. Do you think it could be different this time and foundry industry will still be growing next year? That's my first question. Could you give a bit more color on that?

Well, I mean, we do. And after 2 very strong years in the semi market, we call it super cycle. And we -- and given the recent turbulence and disruption from the market and after this rising macro uncertainties, higher inflationary cost issue, we still foresee the foundry industry growth in 2023 will be more moderate, but it is going to be another growth year, but it's going to be very minimum and it's going to be a more moderate.

How do you think about -- I think different people have asked about pricing, but do you think there is something that has fundamentally changed because we saw this when pricing goes down in a downturn, we have seen that several times. So what is giving you that confidence -- is it confidence in UMC specifically? Or do you think that something has changed in the industry itself that gives you the confidence? Because it seems like you're suggesting that pricing is slightly to largely be stable in a downturn and potentially upward biased in a normal to upturn kind of scenario. So just wanted to understand your process on pricing generally as we get into the down go?

Well, I mean, I can't comment about the industry. And for UMC, our ASP positions, we value long-term partnership over the near-term cyclical. So usually, it's not about the demand and supply situation we think the baseline of the ASP reflects what we can provide in terms of value proposition. We -- then how can we -- and how can we demonstrate that value proposition is through a differentiated technology offering and your manufacturing capability. And you're confident and you're building the confidence and trust with your partners that you are a reliable source. And so they leverage you more -- or they use you or engage you as the preferred foundry source. So we have learned our lesson in the past. When you have multiple sourcing, nice to have a position and you lost your ASP position. So we want to be relevant and we are continuing to increase our relevance in the industry along with our customers. And along with our capacity value to provide a long-term growth to them, and we hope they do see that value in us seeing the change for our market and ASP position. So it's a bit of a contractual, but however, that is the direction that we're marching to.

So maybe one more question on that front. I think you are 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 is a little bit more intense than what we expect today and pricing starts to come under pressure for certain nodes. Will UMC stay away from pricing reaction and you're willing to take some utilization flat -- is that how you think about planning for this down cycle? Or that's still up for debate?

Well, I mean the market is dynamic, and our operation will have a principle, but we will -- we're not going to be naive. And as a management, we will stay paranoid about the market uncertainty. So we will react to the market changes. And we will continue monitoring the market situation and respond to it. And giving the market dynamic. So we will definitely do that accordingly. If you -- we kind of touched about the resilience about how can we help to continue maintaining healthy loading? But at the same time, we do look at this CapEx adjustment issue, and if it's needed. At this point, we maintain our confidence in the megatrend long-term growth. Since this is a long-term strategy. And at this moment, there's no adjustment has not impacted our long-term plan, so there's no adjustment at this moment. If you're referring to other cost control efforts, I can assure you, we have been relentlessly pursuing a cost reduction activity and elevating our line productivity and in production efficiency. And again, all these measures will be in place we will continue monitoring the current market situation in response to that diligently and accordingly.

And next question, Frank Lee of HSBC.

I just wanted to clarify my first question on your overall utilization because you just got, I think, for utilization to remain full through 3Q at 100%. But I guess when we look at some of your competitors who have a very high exposure to 8-inch foundry, the utilization rates are starting to come off mainly because of driver actually being weaker. But I think UMC still has about 40% of your capacity is 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 like what applications or products that you've been able to fill that with?

Sure. Our 8-inch loading remains 100% in Q3. After we're swapping some of the allocation from notebook, TV, smartphone 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.

And I guess my second question is autos, industrials, especially autos has been talked about as a major demand driver for foundry going forward, which was not so obvious in the past cycles. So as we look into the auto space, as you look at capacity expansion in 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 the CapEx spend going forward?

Well, any dynamic from the marketplace, we will be alert and aware and act accordingly. So I mean, it's not limited with auto. But like you said, is auto is the segment that actually help compensating some of the weaker segment today, obviously, we'll pay more attention to it. But auto is not only the strong segment that we're seeing right now for us, we're also seeing some of 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 macro environment and for the outlook. And at this moment, the Q3 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, some of the turbulence and disruption is continued, right? So we just have to be cautious about it.

And ladies and gentlemen, we thank you very much for all your questions. That concludes today's Q&A session. And 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 [email protected]. Have a good day. Thank you.

Thank you, Mr. Lin. 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 2 hours. Please visit www.umc.com under the Investors Event section. You may now disconnect. Goodbye.