United Microelectronics - Q1 2024
April 24, 2024
Transcript
Operator (participant)
Welcome everyone to UMC's 2024 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a Q&A session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcast live over the Internet.
Webcast replay will be available within 2 hours after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations/Investors/Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.
Michael Lin (Head of Investor Relations)
Thank you and welcome to UMC's conference call for the first quarter of 2024. I'm joined by Mr. Jason Wang, President of UMC, and Mr. Chi-Tung Liu, CFO of UMC. In a moment, we will hear our CFO present the first quarter financial result, followed by our President's key message to address UMC's focus and second quarter 2024 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/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 the actual result 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 R.O.C. Securities 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 2024 financial result.
Chi-Tung Liu (CFO)
Thank you, Michael. I'd like to go through the first quarter of 2024 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the first quarter of 2024, consolidated revenue was TWD 54.63 billion, with gross margin at 30.9%. The net income attributable to the stockholder of the parent was TWD 10.46 billion, and the earnings per ordinary shares were TWD 0.84.
Utilization rate in the first quarter of 2024 was 65%, similar to 66% in Q4 of last year. However, the shipment has increased by about 4.5% sequentially. On page five, for the sequential financial comparison, revenue declined slightly to TWD 54.6 billion. Gross margin was down 5.1% to 30.9 percentage points, or TWD 16.899 billion. The operating expenses normally in the first quarter are seasonal low points.
Therefore, we can see the operating expenses were down 13.4% to TWD 5.7 billion in Q1 2024. Our other operating income, mainly subsidies from governments, declined quite a bit to TWD 513 million in Q1. This is largely coming from our Xiamen operations. Their government subsidies recognition is in line with their depreciation curve, which has come down significantly in 2024.
Overall, net income attributable to the shareholder of the parent was TWD 10.4 billion in Q1 versus TWD 13.1 billion in Q4 of last year. EPS was 0.84 for the first quarter. On page six, the year-over-year comparison, revenue also stayed in a similar range, almost a slight increase of 0.8%. Gross margin, however, declined from 35.5 percentage points to 30.9 percentage points in Q1, mainly due to increase in costs, such as depreciation expenses.
For the non-operating income, there's also a big difference, mainly due to our portfolio holdings, investment holdings. This is the mark-to-market gain. It's only about $1 billion in Q1 versus $4.6 billion in the same period of last year. On page 7, our cash is now about $119 billion, and our total equity is $378 billion. Most of the increase is in the PP&E, property, plant and equipment, which right now stands at $254 billion.
On page 8, there's a one-time annual adjustment in our ASP in Q1 of 2024, which is also the main reason that offsets the 4%-5% increase in wafer shipment in Q1. The magnitude is quite similar to that in the first quarter ASP. On page 9, the regional breakdown of our revenue stayed relatively similar, quarter-over-quarter.
Europe declined 3% from 11% in Q4 last year to 8% in the first quarter of this year. On page 10, there's also a big change in the IDM composition versus fabless revenue. So this quarter is 18% versus 82%, while last quarter was 22% versus 78%. On page 11, the application breakdown remained relatively stable. On page 12, we see a seasonal downward adjustment in the sum of our customers, which lead to a small decrease in our 22/28nm revenue percentage point of 33%.
And the rest of the technology geometries are relatively stable. On page 13, our capacity breakdown in 12-inch equivalent capacity, most of the increase is coming from 12A in our Tainan fab, which is our P6 expansion. And there will be some spotty areas of efficiency improvement for some of our other fabs. Total 12-inch equivalent capacity is 1.2 million in Q1 this year.
Our CapEx after the first quarter remained unchanged, still stayed around $3.3 billion cash base CapEx for 2024. The majority of that will be attributed to 12-inch capacity expansion. So the above is a summary of UMC results for Q1 2024. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.
Jason Wang (President)
Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's first quarter results. In the first quarter, our wafer shipments increased 4.5% quarter-over-quarter as we saw a pickup in the computer segment. Despite a slight drop in the utilization rate to 65%, we were able to maintain relatively healthy margins due to continuous cost control and operational efficiency efforts.
Contributions from our specialty business increased to 57% of total revenue, driven by demand for power management ICs, RFSOI chips, and silicon interposers for AI servers. During the quarter, our teams continued to make good progress on key pipeline projects, both customized solutions for customers as well as new technology platforms to serve high-growth segments within the 5G, AIoT, and automotive markets.
This includes embedded high-voltage, embedded non-volatile memory, RFSOI, and 3D IC solutions, in line with our policy to provide a stable and predictable dividend to our shareholders. UMC's board of directors recently approved a shareholder cash distribution of approximately $93 per share, which will be a higher payout ratio than the previous years. This is subject to approval by shareholders at an annual general meeting in May.
Looking ahead to the second quarter, we expect to see an increase in wafer shipments as the inventory situation in the computing, consumer, and communications segment improves to a healthier level. As for the automotive industrial segment, demand remains muted as the pace of inventory digestion has been slower than anticipated.
While we still expect some lingering impact from macro uncertainties and cost headwinds in the near term, UMC will continue to invest in technology, capacity, and people to ensure UMC is ready to capture the next phase of growth driven by 5G and AI innovations. Now, let's move on to the second quarter 2024 guidance.
Our wafer shipments will increase by a low single-digit %. ASP in US dollars will remain firm. Gross margins will be approximately 30%. Capacity utilization rate will be in the mid-60% range. Our 2024 cash-based CapEx will be budgeted at $3.3 billion. That concludes my comments. Thank you all for your attention. Now, we are ready for questions.
Operator (participant)
Thank you, President Wang. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press Star 1 on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press Star 2 to cancel the question. Now, please press Star 1 if you would like to ask the question. Thank you. First question will have Randy Abrams, UBS. Go ahead, please.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. Yes. Thank you. Good evening. The first question I wanted to ask on the 28-nanometer, where you mentioned it seasonally dipped in the first quarter, could you talk about the outlook? If you see that recovering, how do you see the P6 as you bring up the rest of that capacity? How do you see application to fill that capacity or keep it loaded?
Jason Wang (President)
Well, I mean, for Q1, the 22 and 28, we saw a decline. Because we experienced some smartphone seasonality, which led to a lighter 28 and 28 loading, we do expect to pick up the 28-nanometer wafer shipment in Q2 2024. The 28 loading will remain at a relatively healthy level based on current projection, which is supported by products in OLED drivers, larger technologies such as ISP, Wi-Fi, and SoC process applications. After the Q1 2024, we will see higher wafer shipments driven by the demand from both communication and consumer segments.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. Hey, and the blended pricing is firm overall, but you do have the mix shift coming back to '28. Could you talk about the like-for-like pricing environment? If you see next few quarters negotiation, would there be any like-for-like pressure? Or do you expect it would be like first quarter each year would be the time the bigger negotiation happens?
Jason Wang (President)
Well, I mean, that's the typical practice. As we mentioned in the January call, the ASP will remain firm after the one-off pricing refresh in Q1. We are still expecting that. The company's pricing strategy has remained consistent, which is based on our value proposition. At this time, we still expect the pricing will remain firm in the second half of 2024.
However, we do believe that in terms of the like-to-like pricing adjustment and so on, we believe the focus should be elevating our customers' product competitiveness and to help them win more market share. While our pricing strategy remains consistent and aligned with our value proposition, it also includes staying competitive and resilient against the market dynamics. Then we'll continue monitoring the market dynamics.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. So it sounds like broadly firm, but some flexibility where needed if it's, yeah, if it's a competitive situation.
Jason Wang (President)
That's correct. Yes.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. Hey, to revisit the CapEx, I think you mentioned last quarter, the majority of it was either residual for P6 or infrastructure. So a lot of the equipment spend is still to come. But I think you were planning it to start up sometime around Q2 of next year. So is there a way to think about how much capacity in the first phase? And have you made that decision to bring up a first phase? If you have the amount or how much you might need to outlay, and I would think it would be mostly in 2025.
Jason Wang (President)
Are you referring to P6 or P3?
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Oh, sorry. The Singapore. Actually, I was referring to because you're doing the construction of Singapore, so how much you plan to bring up in Singapore next year?
Jason Wang (President)
Yeah. Well, first of all, you're right. Last quarter, we did mention among the 2024 CapEx number, around 60% of the 2024 CapEx will be spent on the 12i P3 infrastructure, as well as some minimum tools and equipment. So we are spending on the P3, but mainly for the infrastructure. Given the current market dynamics and the customer alignment, we are projecting the 12i P3 production run will actually start in January 2026 now. The P3 will run about with high volume starting from the second half of 2026.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. Does that imply off the big CapEx this year? Would you still it sounds like most of the equipment then would push maybe some next year, some actually in 2026. So we should think I mean, yeah, is there a rough way to think about it? Because it would affect the appreciation has been rising, but that could maybe level it out with that push out.
Jason Wang (President)
Right. I mean, we are. We certainly are managing that. We are projecting CapEx will peak out this year and will not impact the company cash dividend policy first. I believe that people care about that, as we have stated in the past. Our CapEx strategy continues to remain disciplined and ROI-driven and also along with our affordability. So that means we are managing that. But the CapEx will be peaked out at this year, 2024.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Yeah. And I did see you have the $3 dividend that you confirmed. Actually, the last question, it ties to the AI. A lot of the attention goes to the high-end, like the GPU, the A6. But you did put in your remarks kind of reminder on the you have the silicon interposer. But could you kind of outline where you still have opportunity? Since that seems like still the strongest momentum driver, where UMC can participate, like silicon interposer or other components into AI or HPC?
Jason Wang (President)
Yeah. I mean, we certainly would like to explore more, but not yet. Well, at this point, while the recent focus of AI chips has been on the most advanced computational chips to run the AI modules, and the chips require handling data transmission and the power management are also equally important. And so UMC's focus is on those two areas, the data transmission as well as the power management.
Specifically, the AI server will need high-speed I/O chips and memory controllers to handle the data transmission and the power management IC for every computing and memory unit to optimize the power consumption. Similarly, UMC's technology offering from 55 nanometers, 12 nanometers, specialty technology, non-volatile memory, 3D IC, they are all well-suited for the edge AI applications such as wearables, smartphones, etc.
So in that, our solution will offer to enable those edge AI devices to achieve the optimal balance among cost, performance, form factor, power efficiency, and we'll continue to work closely with the customers to bring those innovative edge AI solutions to the market. Well, I mean, like I stopped at the beginning, while we are still in the early stage of portfoliating the edge AI, we are recognizing the growth potential of the AI markets.
And we are ready to capture those emerging opportunities. And even we are early, but based on the current projection, we are expecting UMC's addressable market within the overall AI semiconductor market will be around 10%-20%.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. So you'll capture 10%-20% of the AI TAM with your portfolio. Okay. And the.
Jason Wang (President)
Randy, actually, that's more addressable. I hope I can.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Addressable. I should say not capture. Yeah. Your solutions can target, and then it's a share of that. That makes sense. And to clarify too on the silicon interposer, do you plan to expand from the 6,000? I think that was the last guidance you gave, 6,000, if you would add further capacity to that.
Jason Wang (President)
Yes. That's the current 2.5D interposers. Let me maybe elaborate a little bit more on our 3D IC space. In addition to the interposer, our 3D IC offering includes the wafer-to-wafer hybrid bonding, active interposer with TSV, and the 2.5D interposer with DTC. And so the interposer is one of the offerings, and that's where the market is today.
But we are cautiously monitoring the expansion of the current interposer capacity and continuing to focus on expanding on the rest of the solutions. Those solutions aim to provide a cost-effective performance efficiency alternative for semiconductor devices through a vertical stack of silicon wafers or dies, which delivers small form factor, enhances the bandwidth, and lower power consumption for various applications, including the edge AI and the data center and communications.
We are cautious about the current solution with interposer expansion, but we're more aimed for the future expansion for the interposer with DTC and other the interposer with TSV and as well as the wafer-to-wafer hybrid bonding. Yeah.
Randy Abrams (Head of Taiwan Research and Equity Research Analyst)
Okay. Great. No, thanks a lot, Jason, for the call.
Jason Wang (President)
Sure. Thank you, Randy.
Operator (participant)
Thank you. Next one, Gokul Hariharan, JPMorgan. Go ahead, please.
Gokul Hariharan (Managing Director)
Yeah. Hi. Thanks for taking my question. My first question, Jason, I think last call, you had mentioned that your growth rate expectation for Foundry is about high single digit and expect UMC to kind of grow at a similar pace or strive to grow at a similar pace. Is that still your expectation right now, or has anything changed given the slower automotive industrial recovery? Has anything changed on the numbers?
Jason Wang (President)
Hi, Gokul. I mean, yes, you remember well. Let me give you a bit of an update. There are some changes. One, the same areas we did not change. For instance, we still project the semi-industry will grow in the mid-single digits. That did not change. For the Foundry, we will grow at the low teens year-over-year. And that didn't change. However, the majority of the 2024 growth in the Foundry will be driven by the AI servers.
We actually continue monitoring that. I think the biggest momentum is coming out from the AI servers. And therefore, the growth for the UMC addressable market now remains flattish for 2024. However, you're right. Our intention is still to expect to outperform our addressable market. But I think the current addressable market projection for us is flattish for 2024.
Gokul Hariharan (Managing Director)
Understood. That is quite clear. The second question is on some of the specialty projects that you have on RFSOI that you called out and also the high-voltage driver ICs on OLED. Could you talk a little bit about your market presence, especially in RFSOI, how big this is? Because it seems like you're starting to gain some market share from the current market leader on some of these platforms. So could you talk a little bit about these specialty platforms, especially RFSOI and OLED driver IC?
Jason Wang (President)
Sure. I mean, first of all, we continue to address all specialty technology, not just limited at RFSOI. However, we see a good momentum from our RFSOI market penetration. We are seeing a significant market share again in that space. However, I don't have a specific number to share with you right now. I may be able to update you next time. As well as for the non-volatile memory, we also gain some traction on that while we have maintained our market position on the embedded high voltage.
Gokul Hariharan (Managing Director)
Understood. One more question I had is on the as we are kind of moving towards spending primarily for the Fab 12i P3, are there any CapEx offsets that we will potentially get for the Singapore Fab, or is it mostly the prepayment from customers and the government incentives that are mostly on tax breaks and other kind of profit-driven subsidies?
Jason Wang (President)
Maybe, Google, if you can repeat that question again.
Gokul Hariharan (Managing Director)
Yeah. Sorry. I was asking for Singapore Fab. Do we get any capital offsets, like CapEx offsets, that offset over CapEx, or is it mostly going to be tax breaks and other kind of subsidies which kick in once you start production?
Chi-Tung Liu (CFO)
Yeah. We cannot go into detail, but they are government incentives issued by the Singapore government, including both tax breaks as well as the subsidies on capital expenditures. And the overall package is equal or better than our previous investment, the P1, P2, because of the more advanced technology investment we have in Singapore. So we are very grateful for the strong support from the Singapore government. And the enlarged hub in our Singapore operation actually will enable us to receive even more benefit out of these greater economic scales.
Gokul Hariharan (Managing Director)
Thank you, Tom. So the $5 billion spend that we had projected earlier, that is more like a gross CapEx number, we should assume?
Chi-Tung Liu (CFO)
Yes, roughly for P3, roughly.
Gokul Hariharan (Managing Director)
Okay. Understood. And one more question I had is on 8-inch, given 8-inch seems to be still pretty sluggish. Are there any plans on flexibility for the 8-inch capacity? Is there any plans to potentially convert 8-inch to other areas, the compound semiconductors, silicon carbide, or any of those areas?
Jason Wang (President)
Well, first of all, we continue to anticipate pressures from some of the 12-inch material in our fab that has impacted the 8-inch supply chain. So we definitely need to address that. While certainly the mainstream application will remain an 8-inch node, we also try to expand the technology offering to silicon carbide, gallium nitride, but they're still in a very early stage. Most of the silicon carbide today is at a 6-inch, and we are more focused on the 8-inch migration. And we can update more progress once that becomes more mature. Yeah.
Gokul Hariharan (Managing Director)
Okay. Thank you. Thanks, gentlemen. Thank you.
Jason Wang (President)
Sure.
Operator (participant)
Thank you. Next one, Brad Lin, Bank of America. Go ahead, please.
Brad Lin (Director)
Thank you, management, for taking my question. I have two questions. One is on the silicon interposer or the advanced packaging. We have learned that the management is cautious or less, well, active in expanding this part of the capacity. We are on track to hit around 6,000 per month and no further expansion. Should we assume that? A follow-up on that is that we know that we are expanding the other wafer-to-wafer technology and other 3D solutions. When should we expect this part of business to, well, take off? Thank you.
Jason Wang (President)
First question is the interposer. Yes, we will maintain that 6K capacity, and we continue seeing that at a stable run rate for 2024. For the others, some of the RFSOI applications are already starting to use the wafer-to-wafer hybrid bonding solution. They were ready for production in 2024 as well. We will gradually introduce some of the advanced die-to-die and the wafer-to-wafer stacking solutions and gradually increase that capacity as well.
Brad Lin (Director)
Got it. Thank you very much. Glad to hear that. And then my second question would be on, well, node migration. We have landed good business on the 22- and 28-nanometer with the OLED driver IC and some products migrating to 22 and 28 from 40. And we would like to learn the outlook of 40 and the, well, utilization outlook and what products can we expect to help fill the 40-nanometer capacity gap?
Jason Wang (President)
Are you talking about 14 or 40?
Brad Lin (Director)
40.
40. Yes. 40.
Jason Wang (President)
For the mature 12-inch, the utilization rate for both 40 and 65 will remain flattish for the second half of 2024. Of course, this still highly depends on the pace of overall market recovery, and we're closely monitoring that. At the same time, there are applications still coming into the 40 nanometers, such as the RFSOI and as well as the non-volatile memory. There are some of the new applications that will come in adopting the 40 nanometers.
Brad Lin (Director)
Got it. Thank you very much. Actually, I also wanted to ask about 14, 14. So despite the limited capacity currently, there are still emerging business opportunities in the market. Does the firm plan to allocate more resources for the expansions on this 14?
Jason Wang (President)
Our current focus on the things that is on the 12-nanometer cooperation with the U.S. partners, which the program is kicked off at the beginning of this year. The focus is to try to make a good product on the co-development, which is on track. We also see a high level of interest and receive numerous inquiries. At this moment, we are working with our customer to accelerate the ramp schedule for the 12 nanometers. So yes, I mean, the focus will be shifting to the 12 nanometer instead of 14.
Brad Lin (Director)
Got it. Thank you very much, Jason.
Jason Wang (President)
Thank you.
Operator (participant)
Thank you. Next one, Bruce Lu, Goldman Sachs. Go ahead, please.
Bruce Lu (Equity Analyst)
Hi. Thank you for taking my question. I want to ask about, Jason, your view about the cycle. If you look at your guidance, you're guiding for a flat to slide up for the total revenue, which is sequential growth for your quarterly revenues. Most likely, it's flattish or slides out every quarter for the next coming quarters.
Your margin is somehow flat for 30% if there is no more ASP erosion. There is no recovery at all for the industry. It seems to me that this inventory current cycle is a lot longer than expected. When do you see the inventory correction where the restocking demand will start to kick in and provide some minimal help for your business, though?
Jason Wang (President)
I mean, yeah, Bruce, first of all, let's talk about inventory. We have noticed the overall industry inventory level continues to improve. Specifically, we have seen inventory getting to a healthier level in the computing, consumer, and communication market segments. However, we still observe our customer taking a more conservative approach in their inventory restocking behavior.
In other words, we're seeing more of a rush order instead of the confident projection going forward. I think that mainly because the biggest concern is still at the overall macro outlook, which could impact the market dynamics. The other two market segments for the inventory digestion for the auto or industrial segment is still slower, like I mentioned earlier. So I think the market is prudent. The customers are prudent about the market outlook. We do see the overall industry is recovering.
And so we do see the foundry industry will grow in the low teens % year-over-year. However, most of the resources are more allocated to the AI server. So I think the AI server will be with more of a higher growth rate versus the rest of the market applications. And since we have less exposure at the AI server, so I think our projection at this point is more conservative. However, we are optimistic about the inventory situation improving.
Bruce Lu (Equity Analyst)
So if the AI continues to be strong for next year, you will continue to be muted? Is that the basic assumption?
Jason Wang (President)
I mean, well, the other thing is we do foresee the auto and industrial segment inventory situation will become more healthier by the end of the year. So I think all market segments within UMC addressable will become much healthier in terms of their inventory situation starting from 2025.
Bruce Lu (Equity Analyst)
I see. Okay. The next question is for the advanced 3D IC packaging, which Jason started to talk a bit more. I want to know the value proposition for UMC in this business because you don't have the advanced node. You don't have the 3 or 5 nanometers, which is somehow vertical integration is important. So where do you see your value when you don't have the advanced nodes, dies for the packaging? And what's the profitability look like for this business? It's going to be the margin of equality for you.
Jason Wang (President)
Well, I mean, first of all, I mean, you're right. But if we look at this market specifically, some of the devices are looking from a form factor standpoint, and some devices are looking from the enhanced bandwidth standpoint and lower power consumptions. So if you have a horizontal view, I think from the small form factor standpoint, some of the applications do not require most advanced technology nodes.
And some of the applications will probably need a little bit better, but still not the most advanced because they're seeking for the balance between the form factor and the higher bandwidth and the power consumption. But if you're directly referring to the very super high bandwidth, which that's a space that we are not addressing. So there's still a sizable market within the stacking, the 3D IC space for us.
Bruce Lu (Equity Analyst)
That is what you mentioned about 15%-20% of the addressable market.
Jason Wang (President)
That's among the AI.
Bruce Lu (Equity Analyst)
Of the total. Yes.
Jason Wang (President)
Yeah. The overall AI semiconductor market. Yes. And that's part of.
Bruce Lu (Equity Analyst)
Understood. Thank you. Okay. Thank you. And the profitability for this business?
Jason Wang (President)
I mean, we're very cautious about that. We've been running the company, improved our structural profitability for a few years already. Of course, any solution we're offering and operational efficiency will always be part of the consideration. So that will be a profitable operation for us. Yes.
Bruce Lu (Equity Analyst)
So, we can consider as a margin of equality for this business?
Jason Wang (President)
I mean, right now, I can't count on the margin of equality. But we'll try our best to maintain our structural probability. Yeah.
Bruce Lu (Equity Analyst)
Okay. Thank you.
Jason Wang (President)
Thank you, Bruce.
Operator (participant)
Thank you. Next one, Charlie Chan, Morgan Stanley. Go ahead, please.
Charlie Chan (Technology Research Analyst covering semiconductors)
Hi, Jason, Chi-Tung, Michael, and David. Thanks for taking my question. So first of all, Jason, great calls on the cycle and the market forecast. I think your industry peers are converging to your kind of forecast on the non-AI market.
And also excellent job on the pricing discipline. So well done on the margin side. So a couple of questions from my side. So first of all, the CapEx, right? Does that include some spending for the US partner fab? Because you kind of mentioned that there could be some de-bottlenecking required for the US operation.
Jason Wang (President)
I mean, for the 2024 number, that's not a whole lot. So that will not change the current CapEx projection. When we say we pick out in 2024 in terms of CapEx and 2025 will start declining, that's already including that assumption. Yeah.
Charlie Chan (Technology Research Analyst covering semiconductors)
Oh, okay. So any CapEx for that de-bottlenecking should be more in 2025?
Jason Wang (President)
Well, yeah. Most of it will happen there. Yes.
Charlie Chan (Technology Research Analyst covering semiconductors)
Okay. Yeah. Also staying on with the 12-nanometer business, right? You said you try to accelerate customer schedule. Do you think any kind of production can be ahead of 2027?
Jason Wang (President)
We certainly hope so. But a cooperation like this scale naturally comes with various kinds of challenges, right? So we have gone through a rigorous due diligence since day one, and we have been proactively managing those potential challenges. So far, the cooperation has been positive for us. And so we want to focus on to accelerate that. But I can't give you any specifics at this point. But I think I can tell you the project is on track, and we have good confidence that we're making good progress right now.
Charlie Chan (Technology Research Analyst covering semiconductors)
Gotcha. So in terms of the customers' feedback or demand compared to maybe three months ago or six months ago, do you see more commitment from your customers or partners? So I remember the Intel fab capacity is at 50K-60K, right? Are you confident that you can fill that capacity?
Jason Wang (President)
Oh, I mean, we never specifically talk about capacity size. In terms, the capacity arrangement is very typical. We have to work with our customer and align with them based on their forecast, and then we can deploy that. So there's no specific capacity number at this point. Secondly, we are seeing more interest because we announced this early this year.
Obviously, that customers want to know more about it. And so we see a lot of interest. And I think we're making some good traction. But first thing first, we have to demonstrate that ourselves. So all hands on deck is we just focus on our execution today. And given the project execution standpoint, we don't foresee any major risks now. Yeah.
Charlie Chan (Technology Research Analyst covering semiconductors)
Okay. Yeah. So yeah. So I heard that your progress also gets on the nerve of your industry peer. For example, at least a key customer, Novatek, right? I'm not sure whether there's some dynamic that you exceed Novatek's boards because Novatek in the future, probably they will more depend on TSMC. And TSMC also wants to bundle with this customer tighter. So I'm not sure if there's already some countermove from your major competitor in 12 nanometer.
Jason Wang (President)
I mean, first of all, we do not comment on any specific customer. We never do. From the competition standpoint, we more look at this in the way of building a strong relationship with our customers. It can only forge upon a fundamental strength in technology leadership, manufacturing capability, excellence, the capacity offering.
You have to win by that. You don't win by relationship. Having a good relationship is always good, but that's not what we focus on. We will continue strengthening our competitive advantage in supporting our customer and winning their business and building that relationship.
Charlie Chan (Technology Research Analyst covering semiconductors)
Gotcha. Yeah. So, wish you a success. So, may I switch gears to some near-term or financial questions?
Jason Wang (President)
Sure. Absolutely. Yeah.
Charlie Chan (Technology Research Analyst covering semiconductors)
Thank you. Yeah. So Chi-Tung, so on the gross margin side, I'm wondering how you model the kind of electricity cost impact to your gross margin. And also, is it depreciation still growing like 20% year-on-year for 2024?
Michael Lin (Head of Investor Relations)
Yeah. Depreciation should grow around 20% or a little bit less, maybe, given the current new schedule for Singapore P3. The utility impact is actually after the older costs blended together. It's actually rather minimal. Our goal is always to try to offset that through our operating efficiencies and also the benefit from the larger economy of scale. So current forecast is a small impact to our operating to our gross margin.
Charlie Chan (Technology Research Analyst covering semiconductors)
Okay. So it sounds like you don't intend to pass through this kind of minimal additional cost to your customers. Do I interpret this comment right?
Jason Wang (President)
I mean, the cost and the pricing to us is actually two different things. From an ASP standpoint, I mean, our pricing strategy, like I said, is consistent based on our value proposition. And then we and they have to align with that and include stay competitive resilience, right?
But from a cost, we always want to drive the aggressive cost reduction effort to compensate or offset some of the headwinds and to maintain our structural profitability. So it's not a cost-plus business model for us.
Charlie Chan (Technology Research Analyst covering semiconductors)
I see. So in the Q&A with Bruce, I seem to hear you kind of admit that the second-half margin can be also at a similar level. Did I hear it right?
Jason Wang (President)
I mean, we're typically giving guidance quarter-over-quarter. But at this point, we more look at the market outlook. And the ASP projection will stay firm. But we do look at some of the headwinds. Like you said, the utility cost increase, inflationary cost increase, depreciation cost increase. And so there are some headwinds that we have to deal with. So we will continue aggressively to spend effort to improve our cost structure.
And so the goal will be at least to continue to improve our structural profitability from that standpoint. I mean, I have to say, currently, we have been navigating the industry dynamics even with the utilization rate below 70%, right? I mean, so I think we have demonstrated that for the past period. And now, we're dealing with the headwinds in depreciation or all those inflationary cost pressure. And I think we'll continue to do so. And so despite those challenges, we'll have a relentless effort to overcome those challenges. Yeah.
Charlie Chan (Technology Research Analyst covering semiconductors)
I see. So last one from me. So on the end-market trends, one observation so I fully respect, and you have been right about the cycle recovery market forecast, right? But recently, we seem to hear that smartphone supply chain continues to see all the cuts. One of your major customers will report this Friday, I guess. So we are seeing inventory destocking, right? Some tough situation for China smartphones still. But you seem to say the inventory is healthy. So can I know how you're going to reconcile those data points?
Jason Wang (President)
I mean, I kind of touched that. So first, we are cautiously optimistic about the rest of the year. If I put it this way, at this moment, we foresee the Q1 2024 could be the bottom. The biggest uncertainty is the overall macro outlooks that could impact end-market dynamics. So because the insufficient visibility at this point giving the customer is a rush order practice approach, so we feel optimistic about it, but we need to be cautious about it.
If the end-market does not recover as we expected, then we could have a challenging second-half. However, at this point, we have not seen that. So we really hope that if the market continues digesting the inventory, gradually improving the end-market demand, gradually improving, we actually foresee the Q1 2024 will be a bottom for the year.
Charlie Chan (Technology Research Analyst covering semiconductors)
I see. Thanks, gentlemen. Awesome execution on the pricing discipline and also the 12-nanometer strategy. Thank you.
Jason Wang (President)
Given that you have complimented me twice, I have to say thank you. Sorry. Thank you.
Operator (participant)
Thank you. Next one, Sunny Lin, CLSA Go ahead, please.
Sunny Lin (Analyst)
Thank you for taking my questions. I wonder if you can give us more details in terms of the demand in second half? I mean, can you give us an outlook or more details for 28 nanometers or 40, 90 nanometers or 8-inch?
Jason Wang (President)
Well, I mean, let's talk about the Q2 since we're in the current quarter. The Q2 outlook, if we look at the by applications, we expect the wafer demand in consumer and computing segment will grow while the automotive industrial segment will remain soft as they're still digesting the inventory. So they're still in the mixed bag for the Q2.
But overall shipment, I think, will grow quarter-over-quarter sequentially. If you break it down to technology nodes, the 28 and 22 will gradually improve. And for the mature nodes, the 12-inch, the 40, and 65 will stay flatish, while the 8-inch will stay flatish as well. And so that will be the current projection for us.
Sunny Lin (Analyst)
Okay. Thank you. So can we expect that there will be normal seasonality demand in Q3? And how can we expect whether your utilization rate can reach maybe around 70% in this traditional hot season? Can we expect that kind of seasonality or demand in Q3?
Jason Wang (President)
Well, I mean, at this time, the market still lacks sufficient visibility, like I said, for the second half. I tried to give you an example there. We have observed rush orders from customers as they continue to manage their business fluidly. And for auto and industrial, they have a slower inventory digestion. So we think by the end of the year, I think auto and the industrial will be at a much healthier position.
So given the mix of that, it's hard to tell you if the Q3 will recover to a 70% utilization rate. We certainly see some of the market segment has a healthy inventory. So the demand will more directly link to the end-market needs. And versus the auto and the industrial still have to digest their existing inventory on hand.
So if the macro situation is healthier, if the macro is recovered, which we expect on the computer, consumer, and the communication segment, the demand will redirect to us as we improve the loading situation. There's so many different variables right now. Given the insufficient visibility, I can't give you anything specific.
We definitely feel optimistic about it because the inventory situation is improved in many of the market segments already. We just have to continue monitoring the progress. We will keep you updated quarter by quarter.
Sunny Lin (Analyst)
Great. Thank you. So my last question is in terms of 28 nanometers or 22 because on the demand side, actually, we found some of the clients are migrating from 22, 28 to maybe FinFET process nodes, including SSD controller or Wi-Fi 7s. And on the supply side, we found that your competitor in China is planning to enter into mass production for 28 high-voltage process nodes.
So demand is moving into the FinFET process node. And on the supply side, we know that UMC had kept good positions in 28 nanometers. But on the supply side, we found that there's new players planning to enter the high-voltage process market. So how do you look at or how do you plan to keep your market shares or keep your technology leadership in high voltage or in those kind of niche markets or your products to maintain your market shares?
Jason Wang (President)
Well, I mean, fundamentally, the answer to that is we need to stay competitive. In the past and even currently, right now, at this moment, we work closely with strategic customers to build specialty technologies, differentiation, and lasting value for them to enhance our product portfolio as well as our customers' product portfolio and with a diversified capacity.
And so we want to do that to offer our customers with competitive solutions. And so I think that's the answer to that. The competition is everywhere. And the key answer to that is we have to stay competitive. And we'll definitely strive to do that. Yeah.
Sunny Lin (Analyst)
Okay. Thank you. I have no more questions. Back to Q.
Operator (participant)
Thank you. Next one, Laura Chen, Citi. Go ahead, please.
Laura Chen (Managing Director and Semiconductor Analyst)
Hi, Jason. Thank you, gentlemen, for taking my question. I think my question is also kind of a follow-up on the CapEx outlook and also the depreciation. Since Jason, you mentioned that the CapEx will pick up in this year, I'm just wondering that looking forward, how should we look at the depreciation cost trend into next year? How would that impact our gross margin?
Michael Lin (Head of Investor Relations)
So the depreciation impact will be kind of a delay factor. So if the CapEx is peaked in 2024, I think the depreciation expense probably will be peaked two or three years later. So the trend will still be on a minor upward trend all the way to 2026.
Laura Chen (Managing Director and Semiconductor Analyst)
Yeah. So the magnitude of the depreciation cost increase for the following few years, you expect that will be more like a steady increase or that will gradually scale up because still, in the past two years, we see the CapEx increase?
Michael Lin (Head of Investor Relations)
Given our ROI-driven-based CapEx, and we are managing our overall depreciation expenses as a percentage of overall revenue, so I do expect the increased magnitude should be under control and also acceptable by the investor community.
Laura Chen (Managing Director and Semiconductor Analyst)
Okay. Thank you. And also for the AI opportunities, I understand that, Jason, you mentioned that it will be 10%-20% addressable market. And where are we now? And do we expect that will be a secular growth for the following 2-3 years?
Jason Wang (President)
Well, I mean, Laura, like I said, we're still in the early stage of the proliferation of the edge AI. Most of the focus today is running the computation chips for the AI modules today. So we have a very small exposure there. But we do expect the edge AI will start coming in. And there are some of the projects that we have in discussion with customers.
They all have a very high expectation. The market will take it out soon. But I don't have any specifics to say. We do project those applications or those features will be used in the edge AI in the next few years. And that will probably represent at a 10%-20%. It could be even higher. But at this point, we project about 10%-20% of the AI silicon. Yeah.
Laura Chen (Managing Director and Semiconductor Analyst)
Okay. Thank you. Very clear.
Jason Wang (President)
Thank you, Laura.
Laura Chen (Managing Director and Semiconductor Analyst)
Thank you.
Operator (participant)
Ladies and gentlemen, we are taking the last one, the last question. Timm Schulze-Melander, Redburn Atlantic. Go ahead, please.
Timm Schulze-Melander (Partner)
Hi. Thank you very much for taking my questions. I just had two, if I could sneak them in, please. The first one was on the advanced packaging and chip integration. You talked about hybrid bonding moving into greater volume in 2024. Just wondering if you could share a few more details about the end application and if that's the partnership that you had press-released with ASE, Faraday, and Cadence. Is that the application? And then I had a quick follow-up, please.
Jason Wang (President)
Well, first, for the wafer-to-wafer hybrid bonding solution today, the applications for the RF front-end module. It's not completely correlated with the ecosystem press release. To address your part of the question about the ecosystem conversation, for the ecosystem, we are not talking about one specific solution.
We're talking about the UMC overall 3D IC solution is leveraging the entire ecosystem to support that. We do not do turnkey solution, means the end-to-end solution. We're only providing wafer-to-wafer hybrid bonding or the interposer and solution while we have all the ecosystem partners to support the customer to provide the total solution. That's not only limited with the hybrid bonding only.
Timm Schulze-Melander (Partner)
Okay. But for that hybrid bonding, are you actually doing that wafer-to-wafer bond yourself in a UMC facility, or is that being outsourced or shared with some partners?
Jason Wang (President)
It's in-house. Yes.
Timm Schulze-Melander (Partner)
Okay. And maybe just, if I can, one sort of much, much bigger picture, long-term question. The last year or so has seen significant capacity expansion in more mature nodes among China-based chipmakers across a whole range of products. Just as you look out 3, 5 years, how does that sort of influence the sort of strategic landscape and the amount of competition that you see or that you expect UMC to face? Thank you.
Jason Wang (President)
Well, I mean, we kind of touched that earlier. There's a couple of things that we see that's driving the landscape changes. One is we do see more capacity buildup, expanding for geopolitical reasons or for the reason the semiconductor industry has become so important. So people want to build up more capacity regionally. And so there are multiple reasons that drive the overall capacity buildup. And fundamentally, I mean, we believe we need to stay competitive.
So we're working closely with our customer to build differentiations and to provide values to enhance our product portfolio. And the angle is we'll strive to minimize some of the commodities' exposure in some of the selected markets if those capacity build up. And it could affect the market, the end market, with some of the commoditized products. And so we need to continue to differentiate ourselves to minimize the exposure with that.
If we look at the buildup situation, if they are driven by the geopolitical tension, that will, in our view, impose not only this constraint, but it also presents some of the opportunity as a customer seeking alternatives to support their sourcing objectives. And for UMC, we are well-positioned because of our geographically diversified manufacturing sites, which allow us to work with the customers and navigate this geopolitical concurrence.
We are one of the few foundries that have fabs across Singapore, Japan, Taiwan, and China, and backed with a comprehensive technology portfolio, not single node, not limited technology offering, but very comprehensive technology portfolio. And that could be bridging between fabs, which actually is very beneficial to some of the customers if they want to have a fab flexibility, the cross-fab flexibility.
Each of our sites is equipped with a sizable capacity that can serve numerous market segments. Each of our regional manufacturing sites also being well-established with a scale and complete ecosystem. We can run very highly efficient local operations. If you look at ourselves, you look at the longer term, besides our strong manufacturing footprint in Asia, now we also extend our capacity offering into Arizona, which is through the cooperation with the U.S. partner in 12 nanometers.
That's another testament that we're expanding our technology offering as well. So this will continue to further our competitiveness and to strengthen our customer supply chain resilience. So I think we can bring value to customers. That's how you compete. I think we are positioning ourselves to continue to improve our market relevance, our market position.Hopefully, the customer will see that, and they recognize the value. Then we'll stay competitive and to differentiate ourselves. I hope that gave you a bit of context in terms of the bigger picture. Yeah.
Operator (participant)
Thank you. Ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks. Thank you.
Michael Lin (Head of Investor Relations)
Thank you for attending UMC conference call today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at [email protected]. Have a nice day.
Operator (participant)
Thank you. Ladies and gentlemen, that concludes our conference for first quarter 2024. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com under the investors' events section. You may now disconnect. Thank you and goodbye.