Welcome, everyone, to UMC's 2023 Third 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.

Thank you, and welcome to UMC's conference call for the third quarter of 2023. I am joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results followed by our President's key message to address UMC's focus and fourth 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 third quarter 2023 financial results. Chi-Tung Liu: Thank you, Michael. I would like to go through the third quarter 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page four, the third quarter of 2023, consolidated revenue was NT$57.1 billion, with gross margin at 35.9%. Net income attributable to the shareholder of the parent was NT$16 billion, and the earnings per ordinary shares were NT$1.29, which is slightly better than the previous quarter of NT$1.27 and our shipment in the third quarter declined sequentially about 2%. And the capacity utilization rate in the third quarter was 67%. Page five is the income statement for the third quarter. The revenue grew 1.4% sequentially to NT$57 billion, due to a better mix and also, better blended ASP as well as helped by the favorable exchange rate. Gross margin remains somewhat similar to the previous quarter at the 35.9% or NT$20.4 billion. Operating income reached about NT$15.96 billion, which is equivalent to NT$1.29 EPS in the third quarter of 2023. On page six, is the first nine months' performance because of the downturn of the cycle, we witnessed around 20.5% year-over-year decline in our top line, which was NT$167.5 billion. Gross margin rate dropped from 45.8% in the previous year to the first three quarter of the year of 2023 of 35.8%. And EPS for the first three quarter of the year reached NT$3.87 per share. On page seven, the cash on hand still around NT$140 billion with the total asset is more than NT$547 billion. On page eight of blended ASP as I mentioned earlier, due to the better mix and also the difference in between 12-inch and 8-inch with a capacity utilization rate. Our ASP -- blended ASP in the third quarter continue to age up in the third quarter of 2023. For revenue breakdown on page nine, Asia remain the biggest segment of the pie around 58%, which grow about 2 percentage points from the previous quarter. And Europe and North America remain unchanged when Japan declined by about 2 percentage points in terms of revenue breakdown. IDM versus fabulous on page 10, remain unchanged quarter-over-quarter. On page 11, we see a small increase in communication, which is 46% in the third quarter. And consumer drop from 26% in the second quarter to the 23% in the third quarter of 2023. On page 12, along with our increased capacity coming out of P6 in 22 nanometers and 28 nanometers, our revenue also grow accordingly. Now reach 32% in the third quarter of 2023 for total revenue for 49 nanometers and below in the third quarter reached 45%, which are compared to 41% in the previous quarter. For capacity breakdown on a quarterly basis on page 13, P6 continue to have a new capacity common stream, we see about more than 1% capacity increase in the third quarter. And the following quarter in Q4, we expect to see more than 2% sequential capacity growth, also, mainly due to the capacity increase in our Thailand P6 facility. On the last page of my presentation is on fund CapEx, which currently running on track is budget to be remain unchanged around $3 billion for year 2023. So, the above is a summary of UMC results for third quarter 2023. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

Thank you, Chi-Tung. Good evening everyone. Here, I would like to share UMC third quarter results. During the third quarter, despite a 2.3% decrease in wave shipment, quarterly revenue and gross margins remains firm quarter over quarter, primary attributed to the demand strength in computing and communication segments, continuous product mix enhancement as well as favorable currency movement. From end market perspective, strength in computing application was propelled by LCD controllers, WiFi, Codec, and Touch IC controllers. While shipments in communication segments increased due to demand for RF front end IC and networking chips. Looking back at 2023, although, Foundry industry experiences a significant decline in market demand. UMC maintains solid structural profitability supported by furnace in blended ASP due to continuous product mix optimization efforts and increase contribution from specialty technologies. As UMC continues to introduce new specialty technology to solidify our differentiation, we will strengthen the competitiveness of our customers and enhance their respective market positions. For the fourth quarter, with the recent threshold from PC and Smartphones, we expect demand has gradually stabilized it. However, customers still employ a cautious and conservative approach in maintaining a lean inventory level, while automotive business condition appear challenging. For 2024, we anticipate production rent of our 12A, P6 bed will further enhance revenue contribution from 22 nanometers and 28 nanometers, continuing the robust distance traction for UMC. In addition, through our technology leadership, we will remember our offering on 22 nanometer derivative products, which will further our specialty technology product pipeline. Now let's move on the fourth quarter 2023 guidance. Our waiver shipment will decline by approximately 5%. ASP in US dollar will remain flat. Gross margin will be in the low 30% range. Capacity utilization rate will be in the low 60% range. Our 2023 cash base CapEx will be budgeted at US $3 billion. That concludes my comments. Thank you all for your attention. And now we are ready for questions.

[Operator Instructions]. Thank you. And our first question is from Sunny Lin, UBS. Go ahead, please.

Good afternoon, and thank you for taking my questions. So, my first question is on growth margin. I mean Q3 growth margin was actually better than guidance. But even with that Q4 growth margin, it is got to drop towards low 30%. And so, what's the key factors affecting gross margin, into Q4? Chi-Tung Liu: First of all, for Q4 gross margin guidance will be at a low 30% range, mainly due to a decline in utilization rate. As we expected, there will be probably a 5% decline in shipments.

Got it. Then on the overall pricing environment, are you seeing any differences i.e. intensifying competition because of the lower demand recovery portfolio coming few quarters? Chi-Tung Liu: I mean, we are very much aware of the market situation and we respect the foundry market and pricing trends. We are aware of the market dynamic and competitive landscape. So, we will closely monitor in the market in line with our customer on pricing position to ensure our customer's competitiveness. And along with the security market share, that will be our objective. Even given our pricing strategy, in addition, we do believe our value-added technology, manufacturing quality, and capacity alignment support our customers to enhance their market position. However, we observed an 8-inch market landscape has intensified it, like you said. But we may have to adjust some pricing for some market segments to align with the market dynamics. For the 12-inch business, we will remain on our pricing position, which will reflect our value.

Got it. Thank you very much. That's very clear. So, my second question is on 20 nanometer. You don't see have built up a strong presence in some of the products, light OLED driver, Wi-Fi, IP, et cetera. But I believe some of your competitors are also trying to ramp up capacities and capabilities, especially for OLED driver and Wi-Fi. And so, going forward, looking into next two to three years, how should we think about the overall competitor landscape for 20 nanometer? And what are some of the new product opportunities that you will look to rent in the coming few years? Chi-Tung Liu: I mean, there is a couple of questions. What's our current 28 nanometer outlooks, right, for the 22 nanometer and 28 nanometer loading, we have remained resilient amid near-term market volatility, thanks to our customers' stickiness, our diversified product portfolio, and technology differentiation. And we will continue to expand our 22 nanometer and 28 nanometer market share with application like OLED, driver ISP, Wi-Fi, SoC processors, while we are working with the leading companies to bring up more applications on 22 nanometer and 28 nanometer platform. As far as the competition, we do believe, there is always competition there. And we will try to compete with that, particularly in the 28 high-voltage space, you mentioned. We believe -- first of all, we believe the light market will continue to grow and we will continue to maintain our leadership technology position and the market share position, even though we are cooperating with multiple leading customers in those key markets.

Got it. Thank you, very much.

Next question, Nicholas Barrett, Macquarie. Go ahead, please.

Hi. When you guide for 4Q with your shipment will decline 5% Q-on-Q. Is there any segment specifically that we can attribute this to? And what I mean in particular is you mentioned better demand from computer and communication in 3Q. Is it still the case in 4Q or what is changing into 4Q that you could talk about? Thank you.

Sure. For the Q4 outlooks, and currently, we see the PC and the Chinese smartphone segment will remain in line with the Q3. However, for the automotive market even that, the customer have been accumulating backlog from early last year till probably Q1 this year, we expect higher than expected inventory buildup already. As a result, our auto business is a projected to decline in Q4, but four years automotive contribution will still count for meetings as a percentage of our wafer revenues.

Thank you. Do you -- I don't think you report your revenue exposure to the industrial segment, but do you see similar trend in industrial?

It's similar, but it is actually better than automotive right now. They both automotive and industrial is covered under the others. But the major decline is coming mostly from automotive space.

Thank you. Maybe for Chi-Tung, any updated view on depreciation this year compared to last year lining a little bit? Chi-Tung Liu: Yes. In terms of absolute depreciation expenses this year 2023 is likely to be the bottom of recent years. We probably will witness the lowest point in terms of absolute depreciation expenses in 2023, going to 2024 because of our P6 expansion in China. Coupled with the shell construction in Singapore the overall depreciation will start to rebound. And the increase rate in 2024 will be more than double-digit, which will provide a more precise number, precise range in the next quarters conference call.

So, I understand next [Indiscernible] but my mechanical model, very mechanical projection with a percentage of [Indiscernible] and a tells me next year depreciation could go up 25%. Does that sound vaguely possible? Chi-Tung Liu: Well, again, this year we will see 5% to 10% decline first. So, it's a really recent low in terms of annual numbers. But next year, 2024, your number is in the ballpark.

Next one, Gokul Hariharan, JP Morgan. Go ahead, please.

Hi. Thanks, for taking my questions. First of all, this is -- could you talk a little bit about all this capacity that's been announced and coming online in so many places, but especially in China, we start to hear a lot from your customers also about pretty aggressive price code from Chinese foundries and some of the -- your customers starting to consider some of the capacity as well. So, my question is like a little bit longer term. How do you think about pricing, given that industry has seen a pretty nice price increase through the last two, three years of the pandemic years especially? And what kind of the price premium can UMC maintain in like 28 nanometer, 40 nanometer, 65 nanometer kind of nodes over the most this more aggressive competitors that are coming up? And also, could you kind of refresh your memory on what is your current LPA coverage given that you have some of the new capacity that is coming on that has come online with pretty high LPA coverage?

Well, I mean, the competition's always going to be there. As you said, there's many new capacities announced, particularly coming out from the China and from UMC, we have always strived to maintain our competitiveness through a few areas. One is a continuous technology innovation. Second is diversify the production side with a sizable capacity offering, and which is actually become increasingly important. Third is the manufacturing excellence. We all know the both cycle time quality towards the yields so important to customers and for them to be competitive. And the fourth is with the broader customer base and the product portfolio. With this compelling differentiation, we believe we can continue to provide a reliable and dependable path to secure future growth for our customers. So that's pretty much on a higher level, your question relates to in terms the pricing, like I mentioned earlier, we respect the market dynamics and we will stay competitive in supporting our customer to be competitive. And right now, we have discussed and continue aligning with our customer usually on an annual basis as a one-off pricing alignment. And we'll continue with that practice and with the understanding of the market outlook, and for that. And that will be a different pricing position in turn different technology notes, like you said, for 28. And we are remaining resilience, and a mid to near term market volatility as well as a forward-looking product pipeline. And so, we feel rather comfortable about the confidence about our 28 nanometers for the mature 12-inch outlook. We will transition into more specialty technology for our mature 12-inch nodes, and where we foresee promising new opportunities, which coming into notebook and tap space such as RFSOI, nonvolatile memory, and high voltage. And we'd anticipate 55 nanometers and 40 nanometers will be a mainstream for RFSOI and MCU for a broader range of the market, including the wireless, automotive, and industrial application. So again, we will stay competitive and then we will align with the market dynamics and to support our customer in terms the commercial needs.

Could you also refresh your memory on roughly what is your LPA coverage now? I think it used to be about 30% to 40%, but looks like that's blown up, given the new capacity that was coming.

You're talking about NPA or LTA?

Sorry. LTA.

The LTA has been stay 30% flat. It's about 25% to 30%. coverage. And we have been reporting many times in the past. The LPA still is a mechanism to support both customer and UMC on the longer-term perspective. And particularly given the recent market dynamics, and we both are examining our current LPA quality as well as the status on the LPAs. And because our customer continue to want to make sure they are supply resilience, and align with our inches of protecting our investment, so, many LPAs is being a review and we actually believe those LPA has a mutual commitment as a student So the 25%, 30% remain fairly resilient at this time.

Okay. One follow-up on the LPA are you seeing any price downward negotiations on any of your LPAs given that you mentioned that you are seeing some of the videos on the LPAs right now?

During the downturn cycle, we definitely work with our customers and look at the market situation, and giving a change demand and supply dynamics. And we -- but between the UMC and our customer remain confidence in the long-term objective. But in the short-term, we do have sound tactics and flexibility to make the customer and UMC collective to navigate through this market fluctuation. So yes, there are some flexibility in terms of that. With the long-term contractual obligation, even, they are still intact.

Understood. Thank you. One last question for me. How do you think about capacity expansion, given the downturn seems to be lasting a little bit longer than expected and you are running at 60% low P6 utilization, exiting the year? Do you have any thinking about pushing out some capacity expansion further, especially for some of the new capacities and of course importantly, so because, depreciation burden is also rising quite a bit going into next year?

Absolutely. The for the P6, we are already in the process of ramping up. So partly to making adjustments on those. So, we anticipate our 12A/P6 monthly capacity will still reach to 12,000 per month by end of 2023. And you will reach its design capacity of 31,500 per month by September 2024, and that's still there. And the for the P3 Singapore, we have deployed the cleanroom of construction. So, the cleanroom will still be ready by the first half of 2024. But however, we expect the P3 capacity rent starting time at April 2025 without change, and because we have aligned with some of the customer already. However, the REM profile will be moderated based on the market dynamics, which that has some adjustment to the rent profile.

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

Hi, thank you for taking my question. And I want ask you about the outlook for 2024. I mean, based on my mechanical mathematics, you seems to be very comfortable for your P6 expansion with LPA remain on track. So which pieces of fixed work gives you 30,000 worth of a month capacity for next year, each wafer should be $3,000 to $3,500. Your multiple buy that you can easily get larger, 15% plus revenue growth. In addition, you should have some inventory restock for that. So that can easily give you like 15% plus revenue goes for 1299. [Indiscernible] So does that sound right? I mean, at least you can get the revenue goals from your it a contribution from P6, right?

Yes. I mean, of course the revenue growth for 2024 will comp -- it's a composition between the volume and the ASP. So, for 2024, our early view for the next year, we will expect our loading and waiver shipment will increase year-over-year. And so that said, however, the -- we have to look at quarterly outlook by quarterly. Given with Sandy, the current customer's behavior are more cautious and conservative. So, we will provide quarterly outlook on quarterly basis. And so, in terms of actual what will be growth for the next year, we probably will probably give you a bit of a more clarity in the upcoming cost.

But at least for the LTA pricing and environment is for sure, right?

I mean, yes, I mean, LTA right now is still intact. And so, for that portion it is, but that's still some base that have to align with the market dynamic. And also, on the Shanghai, we did talk about for the LTA, there are some flexibility in terms of adjustment. But the longer-term perspective on LTA did not change, but the shorten LTA, it has some flexibility that we are try to align with our customer with. So, they also will come to account for the next year's projections.

I understand. Because the reason I have that LTA alone is one 15% plus for the group, unless you have a lot of push out or additional erosion. Otherwise, that should be the base case.

Well, in theoretically that's correct assumption, but you have to look at the mix.

I understand that. The second thing is that I try to ask a bit different question is that the, if you look at your customer profile, Asia customer contribute a lot more than most of your peers. The communication also consumes a lot -- a major portion of this which result in a much bigger fluctuation in terms of revenue, order, visibility, longevity. Do you see any change, any possibility to see meaningful changes in terms of your customer profile and application profile in the coming years?

I mean, we continue enhance our product mix. I mean, not only from the broader customer mix point of view, also look at from the product mix point of view. So, I think that's the clear focus, alright. However, whether the addressable -- we have to also address, align to our addressable market and whether the addressable market is representing higher percentage of the communications and computing, through the consumer and which is highly tied, aligned with the Asia market. We may not be able to immune from that, but we definitely want continue increase the quality of that mix, and that will be our objective here, not typically from the geographical standpoint.

So, can we foresee a narrower range for the pick and truck margin moving forward? Because margin -- volatility is still very, very big. It's still a lot of investors don't feel comfortable, right?

Right. So, like we said, the technology innovation, differentiation, given the diversified capacity located in a different region and given the specialty offering, we seen that will help us to defend that to a certain extent. The other approach is, we are committed to continue developing the FinFET technology that will actually enlarge the differentiation offering as well. And we continue with that development and in terms the -- and we see some of the progress on our FinFET development as well. We have successfully entered into the mass production of our 22 nanometer business. And we have witnessed some steady rise of the revenue from 22 and then, which we can build upon our 22 low-power logic expanding into the specialty now. At the same time, we based on that customer base, continue migrating to the FinFET, we think that will also help us in terms of differentiation.

Next question Charlie Chan, Morgan Stanley. Go ahead, please.

And first of all, congratulations for great results, the gross margin sustains a very, very good label. So, my first question is really follow on your 12 nanometer. So, I do agree that it's the key approach for UMC to differentiate yourself, especially compared to China competitors. So, since you mentioned that there are some kind of demand from certain customers, can you elaborate a little bit first of all when are you going to spend CapEx for data FinFET capacity? And secondly, you mentioned about low power logic. Can you give us some hints what kind of application products for those 12 nanometer FinFET? Thank you.

Sure. Well, first of all, FinFET does give you a power leakage benefit. So, there is continued with the low power benefit on the FinFET. Well, our plan is to fully explore it, the DUV capability, which we can continue migrating to FinFET for that reason. So, we actively progressing with the development of specialty FinFET based on the 14 FinFET that date that we have, and also the 12 FinFET based upon the current FinFET technology. We are currently engaging with customer on product back performance criteria, as you know, to fulfill their needs. And as for the capacity expansion, the future, think that expansion consideration, all business will still subject to our ROI justification to ensure the proper return on investment. For the capacity preparation, the method that we approach -- the approach that we have is we will employ a cost-effective approach using the existing 22 nanometer and 28 nanometer capacity pool to transition into the FinFET based on a high two conversion rate. So that will help us to achieve our ROI driven criteria. And meanwhile, we will give you more update on our FinFET technology development when it's more appropriate.

Got it. Thanks, Jason. So just roughly, roughly, since you have a great idea about the end demand, even some smart and efficient way to convert capacity for 22 nanometer for that demand. So, can we get a sense when you are going to see a first agreement contribution from 12-nanometer?

For the 12 nanometers, the process will be freeze in early 2025. So, I think there will be time after that. So, when the time comes will probably be better that we will give you more precise projection, because it is based by the probably Q1, 2025.

Okay. Thanks for that. And then coming back to more, kind of, short-term questions, right? So, you mentioned about some rush orders. But you also said that, customers want to keep the inventory offer very, very lean. So, my question is, first of all, do you expect, those lost orders to come in incoming quarter? And compared to the traditional seasonality, do you think, your first quarter revenue or fab utilization will be better than historical sustainability? Thank you.

I mean, we certainly hope that, the rush to come in. As far as for the Q1 outlook, we will provide that in the upcoming January call. The foundry inventory, I mean, the fundamental is, we believe giving the rush order coming out from the PC and the smartphone space, and we believe there is a sign that indicates, the early sign of an asset in agreement for correction for this segment. And however, there are other market segments that are still having inventory build out that could linger into 2024. So, we just have to -- we are optimistic, but we have to be cautious about that. So, we will continue monitoring the rush order situation as well as the DOI situation on those segments. Hopefully, we can validate that the [indiscernible] is for sure. We are out of the inventory correction cycle, but we do know, the auto will probably be lingering into 2024.

Got it. Thank you very much. And my next two questions for, Chi-Tung, if that's okay. So, it seems like, you have a ballpark depreciation increase for next year. And Jason show some confidence about the pricing trend, especially for 12-inch. So, I am wondering, whether full year 2024, you can maintain gross margin at both 30%, because based on the third quarter trend and the forth quarter guidance, I feel like there is the kind of achievable target, but I just really want to get some comments or confirmation from management. Chi-Tung Liu: Yes. We cannot commit on the numbers, but we do foresee a headwind from micro uncertainty such as, utility, green power, and associated carbon cost. Increasing depreciation in 2024. So, but we will strive our best to maintain our profitability structure. So, we will continue with cost reduction effort, hopefully, can offset the impact from those headwinds I just mentioned. But then in terms of numbers, it still will be on a quarterly basis. And we'll provide that next quarter.

And Charlie I may add. Our perspective now is that amid inventory correction cycle, we have dramatically improved our structural probability compared to the pre-pandemic period, and have strengthened by the stable ASP, cost reduction conducting many cost reduction activities and continuous product mix optimization, and the increasing contribution from specialty technology. And all the activity will work off to offset headwinds, such as rising carbon and depreciation. We do expect when the demand return, our probability will also return to a healthier level. We can't really guide your number right now, but we also understand, and humble enough to understand that will be a -- we will foresee some of the cost increase headwinds, and we'll continue to manage that cautiously as we have done in this few years.

Got it. And Jason, so sorry, I come up with a follow-up question to your previous 12 nanometer comment. I'm a little bit surprised that you plan to converse some 28 nanometer and the 22 nanometer for the FinFET, it says, because you have some conservatism for your long term sorry, 20 nanometer demand or why don't you try to buy new equipment to the FinTech capacity extension.

I mean, clearly, I mean, we have for this past few years -- we have driven the -- we do have ROI driven principle that we have [Indiscernible]. So, the converting of 22 nanometer, 28 nanometer capacity is a wonderful possibility. That's the only possibility. So, we will look at overall, all right, and also the company's financials and to determine what would be best approach.

Okay. So, I don't need to interpret it that as kind of some concern about the 20 nanometer over capacity in the long term.

Right. Like I said earlier, once this is more clear and we'll report that at appropriate time.

Okay, thanks. And sorry, the last question to Chi-Tung, is really about -- sorry, actually two questions. So first of all, for your third quarter gross margin, how much of that is coming from the currency depreciation health? And second, small question questions about the China government subsidy contribution to your OpEx and would that totally go away in 24? Thanks.

So, every one percentage point change in currency, it will cost around 0.4 percentage point change in our growth margin. So, that answer your first question. And secondly, for the subsidy for our Xaimen fab that numbers goes along with our depreciation curve for our Xaimen facility, which has come to an end of -- majority of that has come to an end by end of this year. So, going forward, we'll still have some small portion of subsidy coming in, but it will not go back to the previous level.

So, may we know a rough difference between this year and the next year in terms of the total amount of the subsidy from China government? Just a rough idea.

Yeah. On average it will be study slowly decline from the third quarter level, which is a little bit over NT$500 million.

So, NT$500 million in third quarter and will gradually phase out to like $100 million by the end of next year -- the quarter.

It will gradually decline, but we will continue to apply for married-based incentives, not only in China, but in many other our production side as well. So, they will still…

Next one Szeho Ng, China Renaissance. Go ahead, please.

My first question regarding silicon interpose for the capacity we put in will it be dedicated for interpose production only or will it be fungible between interpose and silicon application?

Well, I mean, the silicon interpose is a part of the capacity. For the dedicated two on the silicon interpose cannot be convert back to the other use. But they are common too that can be used. So, I don't know if that qualify as a responsibility. From a dedicated two standpoint, no, it's not, but that's a relatively small portion.

And the other question regarding the automotive inventory adjustment, you mentioned that Q4, we start to see some adjustment, but how long would it last in your opinion?

I mean, the start adjusts after the Q2 this year. And so, we have facing the automotive inventory, I mean, demand adjustment happening starting from Q3 already. And we do believe this will probably lingering into 2024.

2024 the entire year or the first half next year?

Well, I mean, it is also subject to the end market consumptions, right? We hope the correction will be ended in the first part or first half. But also subject to the end market and macro environment. So, we'll continue monitoring that. Right now, we for sure there is even the buildup for automotive space and we do believe that, it will linger into 2024. In terms of whether they will be depleted by early for mid or later? We will continue to update that on quarterly basis. And it is our hope that, they can deplete the earliest possible.

I see. Based on the initial selling, do you think the adjustment will be mostly in Q1 compared with Q4, I mean, for the automotive vertical?

I mean, we already see quite a bit of adjustment in Q3 already, and we continue to adjust in Q4. And so, we do believe that will linger into Q1. In terms of magnitude, again, it was subject to the macro situation. So, we just have to, we have to see it. We also kind of updated earlier saying -- because given the customer current behavior, this behavior is more of a cautious and conservative. So, the visibility is much shorter. And so, we will probably better that if we give you more precise view on a quarterly basis. Right now, our view is that, inventory will linger into 2024.

Next question, Bradley of Bank of America. Go ahead, please.

Thanks for taking my question Hi, Jason, want to congratulate on the strong third quarter results. And I have two questions. So basically, one on the Generative AI end, and other is on the wafer technology of UMC. So firstly, have the firms seeing business opportunities also writing from the end device AI application? And if any, the key specs of those chips and what time do we expect it to take off? Thank you. That's my question.

Of course. In the quarter for sure. But before that, your question about AI. AI is a mega trend and it has rapidly emerged as we see, and there will be a strong demand on related chips on various functionality such as sensing MCU connectivity. And so that's within our addressable market. And so, UMC is proactively preparing those solutions for this market. Then that includes the interposer solution as one. And we hope that having those solution prepared that we can enable our custom to capture those market share in AI applications. So many of the products that we are engaging today, we do see there is high possibility that we will start adding the AI function into it. And so, we just have to align with the product specification and make sure we can enable and support them that. As far as the near-term, very specifically on the interposer, we already in intervals of production. Currently, UMC intervals of capacity plan will be doubled to reach 6,000 per month by Q1 2024. At this point, any additional capacity for interposer expansion what depends on customer demand outlook as well. So meanwhile, we are continuing developing the active interposer, which support the DTC, the deep trenching capacity and for the active interposer, and so on. So, the road map is also aligning with the customer for the future growth in the interposer space.

we believe it definitely depends on very much depends on the client demand. So, compared to our last earnings call, do we see the demand is getting stronger or it's just well flattish in terms of visibility?

We already increased double to 6-K [ph] and beyond that 6-K, we have -- not have any alignment for increase that beyond the 6-K. Right now, the focus is more on the pipeline of continuity for the interpose solution. So, in terms of technology development, that's already aligned for the next generation. But in terms of capacity, no -- there's no number beyond the 6-K yet. Once there's any number increase, we can also report that.

Got it. Thank you very much. So, the second question is on the wafer-to-wafer technology. So, we have learned UMC has been investing in this technology for many years, and what time do we expect the contribution to rise and what are the key applications do we expect it to well adopt this kind of the technology? Thank you.

The first product, by using the hybrid bank will be in the RF front end modules. So -- and that's already, the development's already underway. And so, we do believe that will provide many benefits. So, we have some expectation on that. So, but the programs under development and the product application will be for the RF front end.

Got it. Thank you. And then it, may I know the potential margin profile for this kind of the product?

I mean, as we said, we continue enhance our product portfolio and the product mix and for those specialty technologies, it will continue helping us to achieving that target. So, from a mix standpoint, it will be benefit from it.

Thank you. Ladies and gentlemen, we're running out of time. So, we're taking the last one and the last question from Gokul Hariharan, JP Morgan. Go ahead, please.

I just have one question. Given this comment about the depreciation increase next year, could we talk a little bit about what are our -- like medium-term gross margin targets? Like do we expect to still remain within the 35% to 40% kind of gross margin range? And especially since you're also thinking about potentially developing some FinFET nodes, especially the 12 animated nodes in 2025 and beyond, which are likely to be a little bit more expensive. Just wanted to understand what is the margin kind of range that management is comfortable operating in over the next couple of years?

Yes, of course. Thank you for the question. When Charlie asked about our margin and the outlooks, I kind of adding a comment about, it's our belief that our structural probability is become much resilient and healthier. And so, it's also our belief once the loadings return and the probability will also return to a healthier level. When we talk about a healthier level, we believe it's going to be in a high 30%, 40% range for in a very high loading situation. So, we continue marching into that direction and we have confidence that we -- that's fairly achievable. But given the past few years, we've just gone through the super cycle and now we're going through the down cycle and we want to test that situation, and hopefully that we can report to you more clearly in a later day. But we while we have a mapping model and model it, we think we have a roadmap to achieve that. And in turn, when can we achieve that? We will be giving let's give that test and then we'll report that on a tiny bit. Chi-Tung Liu: As for 12 – capacity build-up, as Jason mentioned, it has to be justified. So, we will do it with the precondition that it won't damage to our overall corporate average structure margins. So, we mentioned that it could be coming from some of the conversion of 22, 28 capacity, which will result in a better margin compared to Greenfield, FinFET capacity. But we are also working on other solution too. So, it will be a few years out in terms of massive FinFET capacity. So, we still will have a few more options coming in the pipeline. We'll definitely keep that discipline. As you can see, for the past few years, we have been keeping that discipline.

Definitely. Thank you. One last question is on the 8-inch side, it seems like in this downtown 8-inch is facing lot more pressure. Many staple products on 8-inch have already migrated to metro 12 inch, whether it's 65 nanometer, 55 nanometer, or even 40 nanometer. So how do you see the 8-inch evolution in the next couple of years? Do you feel that 8-inch, at least some of the capacity will start becoming a little bit obsolete in the industry? Given many applications, really high-volume applications that are migrating to mature 12 inch?

Sure. I mean, the reason 8-inch loading has declined as a result of a demand softness across communication, consumer, and computing segments. We still believe that 8-inch is the mainstream no for PMIC high voltage application. So, we expect that 8-inch loading will improve when the market rebound. The meanwhile, we do see some intensified com competition in the 8-inch landscape, like you said, such as a 12-inch supplier participating in the 8-inch business. Even with some of the question earlier, the Chinese local manufacturing fulfill the demands and for the domestic demands and the pricing pressure as well. So, UMC will continue to strengthen our technology competitiveness, enhance our product and customer portfolio to adjust our -- and also adjust our pricing strategy to address the 8-inch competition. Now, as far as the loading recovery, in the short term, I think the pricing will mitigate sound, the 8-inch business when the demand recovers for the longer term. Well, given the time and the resource required to enhance the fundamental position for the competitiveness solution, where the pricing is not only alternative, and we probably have to do with all above-mentioned effort and focus, and however, we do expect 8-inch loading and product composition will improve to a healthier level. And for the recovery mode, we'll probably undertake for at least 12 months.

Ladies and gentlemen, we thank you for all your questions. This concludes today's Q&A session. I will now turn it over to UMC Head of IR for closing remarks.

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

Thank you. Ladies and gentlemen, that concludes our conference for 3Q '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 Investors Events section. You may now disconnect. Goodbye.