United Microelectronics - Earnings Call - Q2 2021
July 28, 2021
Transcript
Operator (participant)
Welcome everyone to UMC's 2021 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer 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 an hour after the conference has finished. Please visit our website, www.umc.com, under the Investor Relations, Investors Events section, and now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. And Mr. Lin, please begin.
Michael Lin (Head of Investor Relations)
Thank you and welcome to the UMC's Conference Call for the Second Quarter of 2021. I am joined by Mr. Jason Wang, the President of UMC, and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the Second Quarter financial result, followed by our President's key message to address UMC's focus and the Third Quarter 2021 guidance. Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors 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 risks that may be beyond the company's control.
For these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC Securities Authorities. Now, I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's Second Quarter 2021 financial result.
Chi-Tung Liu (SVP and CFO)
Thank you, Michael. I would like to go through the 2Q21 Investor Conference presentation material, which can be downloaded from our website. Starting on page three, the Second Quarter of 2021, consolidated revenue was over the 50 billion mark to reach TWD 50.91 billion, with a gross margin at 31.3%. The net income attributable to the stockholder of the parent was TWD 11.94 billion, and the earnings per ordinary shares were NT$ 0.98. Our utilization rate in this quarter remained at 100% plus for the second quarter. The wafer shipment in Q2 of 2021 was 2.44 million in wafer equivalent. Please turn to page four.
Our quarterly revenue in the second quarter reached TWD 50.9 billion, up 8.1%, helped both by the higher wafer shipment as well as the increased ASP. Profit margin as a result increased to 31.3%, or NT$ 15.9 billion. And overall net income attributable to the shareholder of the parent is 23.5%, or NT$ 11.9 billion. EPS in Q2 2021 was NT$ 0.98. On page five, for the first six months of the year, year-over-year comparison revenue grew by 13.1%, mainly driven by higher volume as well as better product mix and also higher ASP. However, it was somewhat dampened by the increased NT dollar exchange rate against the USD. Gross profit margin reached 29% for the first half of 2021, to TWD 28.4 billion. And overall net income reached TWD 22.3 billion, or 22.8% margins. And EPS for the first six months of the year is NT$ 1.83.
For our balance sheet, our cash on hand is about TWD 124 billion, including about TWD 20 billion will be distributed to shareholders as cash dividend in mid-August. Total equity reached TWD 240 billion. The net asset dollar value per share is around $19.3. On page eight, our revenue breakdown by locations. Sorry, on page eight. Yeah, page eight. Revenue breakdown: Asia remained at 63%, and Japan increased to about 7%. The rest two regions remained somewhat unchanged. Sorry, on page seven, therefore I can skip the page earlier. ASP in quarter two increased by close to 5%. Back to page nine, IDM represents 16% of the total revenue, and fabless is the rest of 84%. On page ten, our communication segment is 47%. Consumer is around 26%. On page 11, our overall revenue below 40 nm is around 38%.
And 28 nm, since it's running at 100% capacity utilization rate, is around 20%, similar to that of last quarter. And the quarterly capacity table shows some incremental increase, mainly for our 12A as well as 12X. And going forward for third quarter, there will still be some debottlenecking type of capacity increase for selected fabs. So for page 13, our CapEx for 2021, the budget remained unchanged, around $2.3 billion. So the above is a summary of UMC's result for Q2 2021. 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, Chitung. Good evening, everyone. Here I would like to update the second quarter operating result of UMC. Strong demand fueled by 5G adoption and digital transformation underpinned our strong performance in the second quarter. Our manufacturing facility achieved 100% utilization, while overall wafer shipment rose 3% quarter over quarter to 2.44 million equivalents. Revenue from 28 nm technology continued to grow sequentially, fueled by applications incorporated into 4G, 5G smartphones, solid-state drives, and digital TV. During the quarter, we continued our product optimization and cost reduction efforts, lifting our gross margin. We expect the strength of structural demand to sustain and support the continuous improvement of a blended ASP. As a result, the company's gross profit in the first half of 2021 surged 54.5% year-over-year to NTD 28.4 billion.
Looking ahead, we anticipate demand to stay robust in the third quarter, driven by mega trends such as 5G and EV. Supply tightness is expected to continue across 8-inch and 12-inch facilities. We foresee margin momentum to continue into the third quarter, supported by further product mix optimization, cost reduction efforts, and productivity enhancements. In addition, we expect the adoption rate of our 22 nm technologies will continue to gain traction, reflected by a pickup in customer's 22 product tape-outs in connectivity and display applications. We will also focus on further strengthening our leadership position in a number of specialty technologies, such as OLED display drivers, RF-SOI, and image applications. Moreover, we continue to take important steps to enhance our corporate governance and lead sustainability efforts in our industry.
Earlier this month, five independent directors were newly elected to our company's board of directors, representing more than 50% of the board seats and including two female directors. The company also announced its pledge to reach net zero carbon emissions by 2050, as well as our commitments to work alongside our partners to reduce carbon intensiveness and raise renewable energy usage in our supply chain. UMC is dedicated to enhance our corporate governance, as well as addressing climate change to build a sustainable environment. Now, let's move on to third quarter 2021 guidance. Our wafer shipments will increase by 1%-2%. ASP in U.S. dollars will increase by approximately 6%. Gross profit margin will be in the mid-30% range. Capacity utilization rate will be at 100%. Our 2021 cash-based CapEx will be budgeted at $2.3 billion. That concludes my comments. Thank you all for your attention.
Now we are ready for questions.
Operator (participant)
Yes. Thank you, President Wang. And 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 zero one 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 zero two to cancel the question. Thank you. The first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Yes. Thank you. Congratulations on the continued improvement. First question I wanted to ask on your strategy for mature 12-inch and 8-inch. Last quarter, when you announced the expansion, it looked more tied to 28 and 40. So I'm curious if you have plans or available capacity to add for the more mature nodes or also on 8-inch?
Jason Wang (President)
The last time we announced the P6 is all centered with the 28 nm capacity with the option to upgrade to 22 in the future. Okay. In terms of the other nodes, in addition to 28, we mainly focus on the limited floor space expansion. So it's rather limited on 40 as well as 50. In general, our strategy in the CapEx is we remain disciplined with the CapEx philosophy. And from our 2017, we always try to drive our sustainable structural profitability based on disciplined CapEx principle. So we have to align with our customer and as well as the market and giving our relevance in the marketplace before we make that decision. At this point, we more focus on the 28 technology at this point. In general, the 12-inch mature node and 8-inch are facing ROI challenges in capacity expansion investment.
We are looking for opportunities to work with our customers to overcome those challenges if possible. In the meantime, we will continue to enhance our productivity improvement and strengthen our value proposition to enhance our customer stickiness within those nodes. That's sort of how we address this.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay, and I guess in talking to overcome challenges, is it your view it's just not the economics, like the return on investment on more mature 12-inch and just not many opportunities to find 8-inch space? Is that more the issue or just more of the view market demand, more of your opportunities 28 and 40? So that's where you'll put the investment?
Jason Wang (President)
You're right. It's more of economics and the floor space available. For any greenfield capacity expansion for the mature node, most likely you're going to be competing with a fully depreciated capacity. Unless the demand is significantly important to the customer, if the economics stays the same, it will be very difficult to have a justified ROI. However, if the customer willing to face those challenges together with us, we definitely will explore those opportunities.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Great. No, that's helpful. Hey, the second question on pricing is getting another good.
Jason Wang (President)
Excuse me? Hello?
Randy Abrams (Managing Director and Head of Semiconductor Research)
Oh, hello. Hi.
Jason Wang (President)
Yes. Randy, you are breaking up.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Oh, live?
Jason Wang (President)
Yeah. Can you repeat your question?
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Yeah. Okay. Sorry, I was cut out for a second. Okay. Yeah. The second question I wanted to ask, if you could discuss your view on pricing from the higher base, we're up nicely in third quarter. Do you expect it would continuously grow in fourth quarter? And if you have an initial view on 2022, the pricing, if you've said anything, or even for the new phase, the phase five expansion, if you'll get higher price? And then do you have a target like where gross margin factoring the pricing you're seeing, where the potential gross margin could move toward?
Jason Wang (President)
Well, we typically don't provide any guidance beyond the quarter. So we definitely will address the Q4 guidance during the Q3 conference. But in general, it's our belief the pricing for structural demand is here to stay. And I also believe our customers are recognizing the UMC value and the margin contribution. So we do expect the strength of structural demand momentum will sustain beyond the Q4 2021.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Just one last follow-up. Looking out to 2023, since you announced your expansion, a number of foundries are also seeing that need and adding capacity. Do you see by 2023 you're contracting in to fix it, but do you view by 2023 a change in that kind of structural, at least, or maybe cyclical, more supply? And at that point, kind of pricing goes back to the normal kind of some erosion? Or how do you see it looking out two years as some of these fabs come online?
Jason Wang (President)
Again, I mean, we're not here to predict about the nature of this industry. In general, a new greenfield fab will take more than two years to build, right? Just like you said, we're not looking at this tightening situation to get relief until 2023. However, based on the industry research, the worldwide semiconductor market growth rate will actually accelerate all the way from 2020 to 2025, driven by the 5G digital transformation, HPC, EV, and IoT. And so we do believe this upcycle will continue for a period. Of course, we can never guarantee 100% fab loading at all times. From the financial perspective, we have to maintain the edge in cost competitiveness to ensure the healthy gross margin. That allows UMC to weather the storm during the downturn. From that standpoint, we have to address this fundamentally, okay?
In order to address and maintain such healthy ASP or gross margin, per se, what we do is from the recent upcycle, we take the opportunity to optimize our product portfolio, enhance our technology competitiveness, and along with our manufacturing capability. We believe those efforts can strengthen our relationship with customers and UMC's market position to maintain the current position. I'm not here to predict whether we can approach this ASP continuously, but I do think by enhancing our capability, we'd be able to compensate the market volatility or even potential capacity oversupply situation. Randy? Randy, I think we lost you again, right?
Randy Abrams (Managing Director and Head of Semiconductor Research)
No, thank you.
Operator (participant)
Thank you, and the next question is coming from Brett Simpson, Arete Research. Go ahead, please.
Brett Simpson (Senior Analyst)
Yeah. Thanks very much. I wanted to ask about some of the long-term agreements you're signing and what sort of commitment, waiver commitment guarantees are being negotiated and how enforceable these agreements are, particularly if we see industry conditions start to normalize after this unusual period of supply challenges. Anything you can share with us around the enforceability of any sort of waiver commitments that your customers are making here long-term? Thank you.
Jason Wang (President)
We reported last quarter, the agreement has a long-term production mechanism to ensure our newly expanded capacity will be maintained at a healthy level. Such mechanism includes the mutual obligation from customer as well as from our side, and so by fulfilling those obligations, we believe that the loading can be sustained at a healthy level. As far as the detail of the mechanism, I'm not at liberty to share on the call, but we actually have a very serious and comprehensive discussion with our customer, and we do believe such mechanism is adequately adopted.
Brett Simpson (Senior Analyst)
And so, even if we have a sudden change in industry conditions, you feel quite confident that your customer obligations will be they will continue to commit to those obligations basically if there's an oversupply situation in the industry or something that we see that we don't in the years to come?
Jason Wang (President)
Yes. We believe it will be well protected from the potential financial implication.
Brett Simpson (Senior Analyst)
Great. Great. And just one follow-up on dividend. Now that you're delivering healthy free cash flow, healthy improvements in margins, can you talk a bit about the vision around dividends and how to think about returns to shareholders? I mean, we haven't had a sort of formal policy from UMC. Is there a payout ratio you look to target in terms of your dividend policy? Any thoughts there around as you continue to sustain this type of margin structure, how the dividends might evolve going forward? Thank you.
Chi-Tung Liu (SVP and CFO)
Yeah. We do have a dividend policy, which is we will pay our distributable earnings in cash no less than 50%. So that's our policy. Of course, for the recent years, we are much higher in terms of payout ratio. But I think going forward, we're looking to distribute a stable and hopefully increasing cash dividend along with our improved EPS.
Brett Simpson (Senior Analyst)
Great. And maybe just one final question. In terms of your implied Q3 guide implies your wafer pricing is up high teens year on year. Does the current ASPs fully reflect your long-term agreements that are in place?
Chi-Tung Liu (SVP and CFO)
The long-term agreement won't kick in until 2023 if you are referring to the P6 project. I think our ASP increase is mainly driven by product mix optimization in quarter two. And there will be some price increase as well as product optimization continue into quarter three. So the long-term contract for P6 won't be effective until 2023.
Brett Simpson (Senior Analyst)
Okay. Thanks very much.
Operator (participant)
Next, we'll have Charlie Chan of Morgan Stanley for questions. Go ahead, please.
Charlie Chan (Managing Director)
Thanks for taking my question. Good afternoon, gentlemen, and congratulations for great results. So I also really want to follow up some questions about the pricing. So just a hypothetical question, right? If there is a kind of a cycle downturn, how confident that management can maintain the current wafer price? I'm not talking about the P6. I'm talking about other than P6. Whether companies think that price can sustain in a down cycle?
Jason Wang (President)
I mean, we are getting guidance for 2021. So we don't think there's any inflection point of the down cycle yet. So for the hypothetical question of going into, let's say, 2023, 2024, for whatever reason, there is a so-called down cycle. We just have to execute in our plan. Like I mentioned earlier to Randy's question, there's lots of activity associated with that. So I don't really think it's the right time to predict whether this is going to be a down cycle or not, but we are definitely prepared to deal with those situations. So our technology offering, so our manufacturing capability, as well as based on the selected market that is more associated with the structural demand, and we believe those activities will help us with the vulnerability in terms of demand change. I think that's how we address that issue.
Of course, again, I'm saying that we can't really guarantee there's always upcycle. Given what we have seen in the recent upcycle, we already took those opportunities to optimize our product portfolio and along with enhancing our technology competitiveness to align with our customer. We are seeing good progress on that front.
Charlie Chan (Managing Director)
Okay. Thanks. Yeah. So when you form your wafer price, no matter for this year or 2022, do you really compare or refer to your industry peers, especially the so-called industry leader TSMC? So my question is actually, do you see, for example, at the 28 nm or 40 nm, do you see any technology gap or quality performance difference versus TSMC? And whether you can price on par or even higher than TSMC? Thanks.
Jason Wang (President)
We do believe we are competitive in those technology processes. In fact, we are continuing to drive our technology offering to enhance those areas, in particular on the HV, the RF-SOI, the BCD, and embedded flash area. We'll continue to strengthen our offering in the technology area. I think we are reasonably competitive in those spaces, not if we're in the leading position. As far as for the price ASP goes, we do believe the customer starts recognizing that and start reflecting. The ASP does reflect some of our technology offering and competitiveness. We've seen the industry market price is a good reference, and we'll continue to benchmark those. We think we are bridging the gap and into a comfortable level. Yes.
Charlie Chan (Managing Director)
Thanks. And then some housekeeping question, right? I mean, I'm not sure what was the progress of your China Xiamen Fab, right? Because previously, there were some challenges about there is some difficulty for China to import some equipment, for example, Applied Materials tool from Applied Materials. Do you think that would affect your capacity expansion plan in China for 28 nm? And also, the question to Chitung is about from here, right? Your gross margin is around the mid-30%. What is company's long-term financial goal in terms of gross margin, operating margin, and ROE? Thanks.
Chi-Tung Liu (SVP and CFO)
For Fab 12X and Xiamen, our Xiamen Fab 12X, we actually have already reached the full scale of 26.5K per month based on our design capacity. Pretty much we reached what we intended to expand for Xiamen Fab already. For our GM question, the GM outlook, our CEO, our President will comment on that.
Thanks.
Jason Wang (President)
For the gross margin outlook, our gross margin outlook will be mainly derived from our production efficiency as well as the ASP trend. UMC, as a company, will continue to work on the product mix optimization. I kind of touched that earlier, and continue efforts on cost reduction efforts and operation efficiency in order to strengthen our structural gross margin, so we do have expectations that continue to improve on that. Yeah.
Charlie Chan (Managing Director)
Okay. That's great. Thank you.
Operator (participant)
And next question, Roland Shu, Citigroup. Go ahead, please.
Roland Shu (Analyst)
Hi. Good afternoon. Thanks for taking my question. Now, your 28 nm is the biggest node in revenue. I would like to know how the 28 nm contributes to the upside to your total profit. And also for your 45 nm, the revenue actually continued declining from 3Q last year. And is there any empty or idle capacity for 45 nm? Or are you converting at least the 45 nm capacity to 28 nm or others? Thanks. That's my first question.
Jason Wang (President)
Yeah. All our nodes are actually fully loaded, and they're giving a different mix. Mix of the wafer out in different quarters. You will see some variation in the mix of the technology nodes. By this time, there is no vacancy in the fab. In fact, all nodes are running over 100%. The question about the 28-nm expansion going forward to the gross margin. Our unique 28-nm logic and specialty technology offering will enhance the customer's competitiveness. As a result, I think the customer's reliance on our 28-nm capacity is in great demand. This competitiveness will allow us to enjoy a healthier EBITDA margin in the longer term. In the longer term, we actually expect the 28-nm nm capacity expansion will play as a catalyst to further drive our gross margin expansion.
Roland Shu (Analyst)
Understood. So even for your 3Q gross margin guidance, mid-30 percentage points, I think that they also have a big contribution from 20-nm, right?
Jason Wang (President)
Yes. The ASP in Q3 guidance, the ASP is expected to grow 6% quarter over quarter, primarily driven by price adjustment. In our Q2, the ASP increase is mainly driven by both the price adjustment on the selected application in 12-inch in the mature site and as well as 8-inch, and also coupled with the product mix improvement, which means a higher 28 nm shipment. That's Q2. For Q3, our expected ASP growth is primarily driven by the price adjustment of the 12- and 8-inch nodes.
Roland Shu (Analyst)
Understood. Okay. Yeah. But I think my question actually is for the gross margin for 20-nm. How does it contribute to your gross margin in 3Q?
Chi-Tung Liu (SVP and CFO)
We have mentioned that 28 nm has no doubt the highest EBITDA margin compared to the other main nodes, mainly because of higher ASP, and all the dynamics, the parameters are dynamic quarter over quarter, so we cannot give you a straightforward answer, but as Jason just mentioned, for the longer term, 28 nm for sure will be a catalyst in driving our margin expansion.
Roland Shu (Analyst)
Understood. Thanks. I look at your annual report. I think at least your contract with Jinhua was due in May. So I would like to understand, will there be any impact on your P&L or on your balance sheet from 3Q or onward after this contract has been due in May?
Chi-Tung Liu (SVP and CFO)
So for the contract, it has been currently on hold. Okay. So there's no any progress at all for this Jinhua-related activity. So no.
Roland Shu (Analyst)
So no financial impact as well, right?
Okay. Okay. Thank you. And also, now you have been loading every node or your capacity at more than 100% utilization. However, I think that in the past several quarters, every quarter, you still managed to increase the capacity by several percentage points by capacity debottlenecking. So I just want to know how long can you still debottleneck your capacity going forward? And will it be sustainable for you to increase at least 2% to 3% or even several percentage points of the wafer shipment increase every quarter from capacity debottlenecking, even though you are loaded at very high utilization?
Jason Wang (President)
The debottlenecking and the capacity improvement is ongoing efforts that will continue. For the capacity expansion, if you're referring to the overall result here, our 2021 actually increased about 3%.
Roland Shu (Analyst)
Yeah.
Jason Wang (President)
Right? And for the 2022, we expect to increase by another 6% year over year. So that's going to be a new expansion. And all the debottlenecking and the productivity improvement will be on an ongoing basis.
Roland Shu (Analyst)
Okay. Thank you. Yeah. That's all my questions. Thank you.
Operator (participant)
Next question coming from Szeho Ng, China Renaissance. Go ahead, please.
Szeho Ng (Managing Director)
Oh, hi. Good evening, gentlemen. First question regarding P6. Initially, it's targeting to 28 nm and 22 nano. I just wonder if the capacity will be upgradable to 40 nano or 14?
Jason Wang (President)
The answer is yes. Both nodes are flexible to manufacture for 14. Yes.
Szeho Ng (Managing Director)
Okay. Great. And how easy would that be for the upgrade? And how much would it cost roughly on a per-k basis?
Jason Wang (President)
The number is actually. I don't think we're ready to quote that number because I think the number is. There's still some uncertainty with the numbers. But the common two on 28 nm, the bulk to the 14 things that are in a high percentage range. So we do believe that is the right node for potential upgrade. And since we're not there yet, I'd rather reserve this specific number at a later time. Yeah.
Szeho Ng (Managing Director)
Okay. Great. Yeah. No worries. And regarding the FinFET, what's the company's latest thought on that part of business?
Jason Wang (President)
Again, I didn't get that number.
Szeho Ng (Managing Director)
What's the company's strategy for the FinFET going forward?
Jason Wang (President)
Oh, I mean, when we developed the technology, actually, when we ceased the capacity expansion on the 14 a few years back, but we did not cease the technology development on the 14 for the reason I mentioned earlier. Meaning the 14 and the 28 nm still have a high percentage of common tool conversion ratio. And also, the 14 does provide some technology advancement in terms of power saving. So we believe that's the right technology to continue developing. So at this point, the 14 is being fully developed. However, we are aligning with our customers and triggering the CapEx decision. Given the current market outlook, the 28 nm remains to be a strong node. So we still prioritize our resources on the 28 nm at this time. So the options there, but it's still subject to our, what I said, the CapEx policies.
So we'll continue guided by that and at the right time, at the right place, and the right volume, we'll make that decision. So the 14 is an option for us.
Szeho Ng (Managing Director)
Okay. Great. And my second question is regarding the profitability of your Japan fab. And how does it compare with the group average right now?
Chi-Tung Liu (SVP and CFO)
So based on the integration effort at 12M, which is our Japanese fab, the cost reduction activity and productivity improvement has led to a very efficient operation enhancement. Therefore, we do expect the 12M, the Japanese fab gross margin, will be in line with UMC's 12-inch corporate average.
Szeho Ng (Managing Director)
Okay. Great. Okay. Yeah. Congratulations. And thanks for answering my questions.
Jason Wang (President)
Thank you.
Operator (participant)
Thank you. And next question is from Nicolas Baratte. Macquarie, go ahead, please.
Nicolas Baratte (Analyst)
Yes. Hi. Could I clarify if I heard properly? Mr. Wang said capacity this year increased by 3% and next year 6%. Was this correct?
Jason Wang (President)
The capacity increase for 2021 this year is 3%. That's the year-over-year for 2021. The 6% year-over-year is in 2022.
Nicolas Baratte (Analyst)
The 6% year-over-year. Thank you. Thank you very much. Since you're running at 100% utilization, does that give you better visibility into the coming quarters?
Chi-Tung Liu (SVP and CFO)
Visibility for the next quarter, of course, it's quite solid. And we continue to work with our customers closely about their rolling forecast. So for the visibility right now, of course, I think it's better than most of the time we experienced in the past.
Nicolas Baratte (Analyst)
Would you say that gives you visibility into beginning of next year?
Jason Wang (President)
Well, I mean, we do have visibility because given the recent supply and demand imbalance situation, customers tend to have a longer-term discussion with us. So yes, the answer is yes. We do have visibility all the way from now to the end of 2022. But again, this is a market dynamic in there. So we have to continue tracking the market. Given the current observation, we do expect the demand will continue to outpace the supply driven by the mega trend. So in the near term, we have not seen any sign of inflection point yet, as I said earlier. And so we don't see there's any signal that indicates the current situation will change. So yes, we do have some visibility, and we haven't seen any sign of a change in the situation.
Given the mega trend of some of the applications from 5G to EV, IoT, we think this is the demand is going to stay here. Yeah.
Nicolas Baratte (Analyst)
Okay. Understood. Maybe for Q2, do you have an estimate for 2021 for this year about operating expenses and D&A?
Chi-Tung Liu (SVP and CFO)
So operating expenses for this year and next year is under control. I think our goal is really to maintain a steady percentage of ratio to our overall revenue. And of course, revenue is continuing to grow. So the rate of revenue growth certainly is outpacing the rate of OpEx increase.
The percentage of OpEx not increasing. I'm asking because typically, as you mentioned, 22 tape-out and specialty processes, and at the same time, a bit more capacity increase than in the previous years, right? All those things cost a bit of money, I guess?
Yeah. Definitely. But we all have more resources as well given the stronger performance. So again, we will control the ratio as a percentage of OpEx to revenue instead of the absolute dollar terms.
Nicolas Baratte (Analyst)
Understood. And for D&A, Chitung, any rough number?
Chi-Tung Liu (SVP and CFO)
The same thing. I think the biggest component for expense increase is really the employee-related compensation because of the better performance. The bonus equivalent to employee will be higher. But the rest, again, is well under control.
Nicolas Baratte (Analyst)
Good. Thank you very much.
Chi-Tung Liu (SVP and CFO)
Thank you.
Operator (participant)
Next question, Gokul Hariharan, JPMorgan. Go ahead, please.
Gokul Hariharan (Managing Director)
Yeah. Congrats on the good result. First question, just wanted to explore a little bit on the blended pricing. Seems like ASP continues to accelerate roughly 3% in Q1, 5% in Q2, and 6% in Q3. Is there an updated guidance on how much we expect blended ASP to go up this year? I think previously we talked about high single-digit approaching 10% last quarter. Is that going to be higher? And secondly, on the pricing itself, given that you have visibility into next year and you have a lot of commitments to the end of next year itself, could we talk a little bit about how we think about blended ASP as we go into next year? Is next year also a pretty strong price increase year because of product mix as well as some price adjustments? That's my first question.
Jason Wang (President)
Okay. So in 2021, our target ASP growth will be around 10%-13% year-over-year. The pricing also includes our product mix improvement, pricing adjustment. UMC does value long-term partnership over near-term cyclical factors. So therefore, our current ASP lift mainly reflects the value of our position right now. In terms beyond 2021, I kind of touched that earlier. The pricing of the structural demand, we believe, is here to stay. Our customer does recognize that. So we expect the strength of the structural demand momentum will sustain beyond Q4 2021.
Gokul Hariharan (Managing Director)
Got it. Just one more question on the CapEx side. I think when we talk about the NT$ 2.3 billion CapEx this year, how much of our Fab 12A, P6 expansion does it cover? Given that we are also looking for around 6% capacity addition next year, do we expect CapEx to stay around these levels as we look into next year as well?
Jason Wang (President)
Probably. Yeah. We announced the P6 program will be somewhere in the 3.7 billion CapEx. And the estimated ramp schedule will be sometime in the second quarter of 2023. So most of those will probably happen within 2022. There's a very minimum portion of that is within the 2021 number. So I think that we'll provide that. We'll provide that guidance by end of this year for 2022.
Gokul Hariharan (Managing Director)
Understood. Maybe one more question. Given that we are seeing a lot of tightness, especially in 8-inch, and as you mentioned, Jason, facing an ROI challenge in terms of capacity expansion also, could we talk a little bit about how quickly or how keen are customers to migrate some of their 8-inch products to more mature 12-inch technologies? Also, given everything is tight, how feasible is it for them to do that over the next, let's say, 6-12 months?
Jason Wang (President)
Just like you mentioned, the old nodes are tight across from 8-inch to 12-inch. So if the purpose of the migration is to add to additional capacity in 12-inch, that will be very challenging. The natural pace of the migration will continue. I think on different applications, those activities are ongoing. But for capacity reason, I think this is going to be rather challenging at this time because all nodes are very, very tight right now.
Gokul Hariharan (Managing Director)
Understood. Just last one. When you talk about the 6% capacity increase next year, is that also largely in 28 and 22, or are you thinking a little bit more on 40, 55, etc., also?
Jason Wang (President)
The rate of the 22, mainly, is still led by more than 20% year-over-year growth in our 28 nms. Okay. There will be some increase in the 8-inch advanced node, which means below 0.18 through some of the upgrades, and so this is probably a combination of those are the main nodes.
Gokul Hariharan (Managing Director)
Got it. Thank you. And congrats on the good result.
Jason Wang (President)
Thank you.
Operator (participant)
Next question, Bruce Lu, Goldman Sachs. Go ahead, please.
Bruce Lu (VP and Equity Analyst)
Okay. Thank you for taking my question. Congrats on the great result. And I'm actually very impressed about your ESG improvement, especially that more than half of the board directors are independent directors, which is important for the long-term shareholders. So I noticed that for the last two quarters' news announcement, you addressed a lot of automotive. Can you tell us what is the revenue exposure to automotive right now, and what's your target in two-to-three years? What are the key applications and the process nodes for the automotive customers? Do they carry higher or lower than corporate average margins?
Jason Wang (President)
Our revenue contribution for automotive is rather small. They're still below 10% mark, and they asked the demand recovery issue from the end of 2020 for automotive, so we are putting some resources to support that and priority to support that. And from year-over-year standpoint, we increased the absolute number probably by close to 20% in the auto segment, so we are putting some priority and resources to support that urgent need. So as far as the customer's margin goes, we don't comment on specific customer or segments' margin and whether on a corporate level, so I think in general, they are reasonable in a reasonable ASP level.
Bruce Lu (VP and Equity Analyst)
Okay. So, can I ask in a different way that can we expect automotive revenue to be more than 10% in a year or two? And what are the key applications within that auto segment for your customers?
Jason Wang (President)
I think from the application standpoint, we are putting more resources to the automotive space. So we are expecting the automotive space will grow. And I don't have a number to quote it here. And we can provide that on an ongoing basis.
Chi-Tung Liu (SVP and CFO)
Just to add on that, we mentioned EV is an important driver for our Silicon content going forward. So we would like to take a broader view that the auto industry should eventually include the EV as a driver as well. So that percentage certainly is likely to continue to increase.
Bruce Lu (VP and Equity Analyst)
Okay. Thank you. So next one, I always like to ask your R&D expenses. I mean, if you look at your R&D expenses in the first half, it's already like 6.5%, which is down from 8%-9% in the last couple of quarters. So basically, what is the long-term target right now? I mean, Vanguard's R&D expenses is about 5.5% of the sales. Is that a reasonable target for your R&D expenses?
Chi-Tung Liu (SVP and CFO)
We think current R&D expenses is about right. I think certainly we want to allocate more resources to our R&D effort in order to differentiate ourselves, especially on the specialty technology and also the future technology related to 5G and EV. And again, the absolute dollars will continue to grow, but certainly the percentage of revenue will be well controlled.
Bruce Lu (VP and Equity Analyst)
I see. Okay. Thank you. Lastly, for the P6 profitability, I remember last time when management was talking about, which is roughly 30-plus% gross margin for the P6. But if we fast forward to 2022 or 2023, this gross margin will be lower than the corporate average in a meaningful way. So does that sound right?
Jason Wang (President)
We expect the P6 will have a better gross margin, meaning higher EBITDA margin than the 12-inch corporate average. And we adopt the P6 because we believe this is a win-win cooperation model that not only secures long-term capacity for customers. The predetermined pricing will also enable UMC to grow organically and to meet our long-term profitability. Given our corporate average gross margins are on the rise, the initial P6 gross margin will be in catch-up mode, like you said. However, over time, the P6 gross margin will eventually enhance our corporate average.
Bruce Lu (VP and Equity Analyst)
I see. Understood. Your corporate average gross margin improvement is much faster than we think. So that's why it creates some discrepancy. Okay. Thank you. No more. Thank you.
Jason Wang (President)
Sure. Thank you.
Operator (participant)
Next question is from Nicolas Gaudois, UBS. Go ahead, please.
Nicolas Gaudois (Head of Apac Tech Research)
Hi. Good evening. This is Nicolas from UBS, standing for Sunny Lin. Two quick questions. First, going back to LTAs, is there a way you could quantify perhaps for us how much of the expected capacity for P6, which I think is 27, 28K wafers per month, will eventually be covered by LTAs? And secondly, going back to specialty processes, could you maybe give us more color as to which ones you see the better traction of customers right now between low-power embedded memory MCUs, HV, CIS, etc.? Thank you.
Jason Wang (President)
The application strength from the overall global demand perspective and within the application, the capital is really more of a 5G transformation, and of course, we mentioned about EVs and as well as the digital transformation on the IoT devices, and for the 5G transformation, associated with the HV device has probably the strongest momentum. That includes OLED drivers, and the 5G also has ISP, Wi-Fi 6, RF switch, so those will be probably the strongest momentum at this point due to the 5G megatrend, and followed by the MCU and the power management.
Nicolas Gaudois (Head of Apac Tech Research)
Great. Thank you. And how about the LTA question for P6, please?
Jason Wang (President)
For P6?
Chi-Tung Liu (SVP and CFO)
Can you repeat your question?
Nicolas Gaudois (Head of Apac Tech Research)
Sure. So when you talked about customers signing LTAs for P6, approximately when you look ahead and when you would reach 27-28 thousand wafers per month in P6 capacity, how much about do you think is likely to be covered by LTAs? Thank you.
Jason Wang (President)
The old P6 program is covered by the contract, yes.
Nicolas Gaudois (Head of Apac Tech Research)
Great. Thank you very much.
Operator (participant)
Next question, Julie Tsai, UBS. Go ahead, please. Julie, you are now on the line.
Julie Tsai (Equity Sales)
Hi. Thank you. I would just like to ask the management to give us maybe a long-term gross margin target. It is just because the recent quarters, your gross margin has been improving quite fast in a very rapid pace. And perhaps give us a guideline of a long-term target on this margin improvement.
Jason Wang (President)
I kind of touched that question through an ASP trend, but the question always comes back to the gross margin. Our margin outlook is mainly driven by all those factors I mentioned from production efficiency, ASP, and product mix optimization, cost reduction, so on and so forth. So we believe those will give us just a benefit to strengthen our structured gross margin. So we do expect this gross margin to probably continue to improve, I would say. But I don't think we're ready here to give any gross margin guidance or any gross margin outlook for our target, yeah.
Julie Tsai (Equity Sales)
So in a way, we should view that the possible upside could still be there or the recent quarter's margin is not sustainable?
Jason Wang (President)
Oh, we certainly believe all the structured demand, all the existing environment is here to stay. So I don't think there's, in the near term, we haven't seen any inflection point that this will change in a different direction. I think the direction is we still marching to improve our gross margin. Yes.
Julie Tsai (Equity Sales)
Got it. Thank you. And then also a follow-up. How do you run utilization rate at more than 100%?
Chi-Tung Liu (SVP and CFO)
It's actually 100%. Just 100% plus is meaning it's really full. So in most cases, yeah.
Julie Tsai (Equity Sales)
All right. Okay. Thank you. Congrats for a good result.
Jason Wang (President)
Thank you.
Operator (participant)
Ladies and gentlemen, we're taking the last one. And the last question is from Randy Abrams, Credit Suisse. Go ahead, please.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Yeah. Thanks for squeezing me. Two final questions. Chi-Tung, could you give an update on the depreciation trend for the next one to two years now on the new CapEx plan, how we should factor that in?
Chi-Tung Liu (SVP and CFO)
I think for this year and next year, we are talking about around 5% or less decline for our overall depreciation expenses, and for 2023 it really depends on the equipment we brought online, and right now the lead time is actually quite long, so it's a little bit difficult to predict the depreciation expenses for 2023. However, again, we will control it through a percentage of revenue benchmark, and percentage-wise we hope it will be a steady decline rate, but the absolute dollar term depends on the new capacity come on stream.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. And the other one I want to ask, the other income bumped back up to TWD 1.6 billion. Was there a factor for that lift? And then looking forward, is there a certain level that continues? Is that still tied to the Xiamen? And how would that continue out into the future?
Chi-Tung Liu (SVP and CFO)
Just once a year, there's extra subsidies related to our syndicated loans. And I think that will be the last time for this second quarter. Going forward, I think around TWD 10 billion per quarter will be a norm for each quarter, at least for a few years.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Say that again. It was.
Chi-Tung Liu (SVP and CFO)
1 billion per quarter.
Randy Abrams (Managing Director and Head of Semiconductor Research)
1 billion per quarter.
Chi-Tung Liu (SVP and CFO)
Yeah. Per quarter would be the norm. Yeah.
Randy Abrams (Managing Director and Head of Semiconductor Research)
Okay. Great. Okay. No, that's all my questions, and thanks a lot.
Operator (participant)
Thank you. And 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.
Michael Lin (Head of Investor Relations)
Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at [email protected]. Have a good day. Thank you.
Operator (participant)
Thank you, and ladies and gentlemen, that concludes our conference for the second quarter of 2021. Thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com. Enter the investors' event section. You may now disconnect. Goodbye.