UMC 联华电子

Operator

Welcome everyone to UMC’s 2013 Third 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 broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website, www.umc.com under the Investor Relations Investor Events section. And now I would like to introduce Mr. Bowen Huang, Head of Investor Relations at UMC. Mr. Huang, you may begin.

Bowen Huang

Thank you and welcome to UMC’s conference call for the third quarter of 2013. In attendance today is the CEO of UMC, Mr. Po-Wen Yen, and then our CFO, Mr. Chi Tung Liu. To start thins off; our CFO will present third quarter financial results followed by our CEO’s key message to address UMC’s main area of focus and the UMC’s fourth quarter guidance. Once our CEO and CFO complete their remarks, there will be a Q&A session. UMC’s quarterly financial reports are available at our website www.umc.com under Investor Relations Financial Release 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 those risks please refer to UMC’s filings with the SEC in the U.S. and the ROC securities authorities. I would now like to introduce UMC’s CFO, Mr. Chi Tung Liu to discuss UMC’s third quarter 2013 business results.

Chi Tung Liu

Thank you, Bowen and hello day everyone. For the third quarter of 2013, revenue was NT$33.41 billion, with gross margin at 22% and operating margin at 7.2%. The net income attributable to the shareholders of the parent was NT$3.48 billion and the earnings per ordinary shares were NT$0.28. And if you refer to our earnings presentation, you can see on page three, our operating results summary. Our third quarter utilization rate was 87%, that come from 1.329 million inch equivalent wafer shipment over our quarterly capacity of approximately 1.5 million per quarter and cash on hand at the end of the third quarter was NT$50.3 billion with total assets of approximately $10 billion U.S. And if you turn to Page 4, you can see our third quarter income statement and as we mentioned earlier, revenues grow 4.7% to NT$33.4 billion that comes from over 2% increase in ASP and over 1.5% in wafer shipments. Gross margin was 22% or NT$7.3 billion. We continue to tighten our cost control, so operating show a 2.5% quarter-over-quarter decline to NT$4.89 billion and operating margin as a result has improved from 3.6% in the previous quarter to 7.2% or NT$2.39 billion in the third quarter of 2013. In quarter three we always collect majority of our investee dividends. So total non-operating income in the third quarter was NT$1.56 billion and as a result, our net income attributable to the stockholders of the parent in the third quarter was NT$3.47 billion or an EPS of NT$0.28. And if we turn to Page 5, this first nine months performance on a year-over-year comparison, our revenue grow about 7.2% year-over-year, which is mainly due to the combination of revenue from exchange. And gross profit is 19.3% or NT$18 billion. And operating income was around NT$3.8 billion or .4.1% which has showed a further improvement from the previous year and EPS for the first nine months is NT$0.95 per share. On Page 5 this highlight for our balance sheet and other than the NT$50 billion cash, and we also have about $10 billion U.S. in total assets and NT$211 billion in stockholder equity. For operating segments on Page 7, most of our revenue and earnings coming from across the foundry operations and new business which mainly compose of solar and some LED investment is only about 5% of the total revenue and still in the loss-making condition given the tough competitive environment out there. And for the earnings for foundries in the third quarter, it is NT$3.5 billion. And for average selling price in the third quarter, it went up about more than 2% and mostly due to higher portion of leading edge wafer shipments. And if we turn to Page 9 for a revenue break-down, as you can see that we have 44% of revenue coming from Asia and Japan has showed quite an improvement, improved to 6% in third quarter from the 3% in the previous quarter and IDM also show a 4% increase from 10% to 14% in the third quarter. And on Page 11, the revenue break-down by application did not have too much change. Computer is 16% and Communication is 52% and we continue to migrate to final geometry and 40-nanometer still above 20% of revenue and total revenue below 65-nanometer has increased to 54% in the third quarter from 51% in the second quarter. And capacity, as I mentioned earlier is approximately 1.5 million inch equivalent per quarter and we continue to add more leading-edge capacity. In the third quarter and fourth quarter, most of the capacity increase is coming from our Singapore 12i Fab in the 40- nanometer capacity. And that concludes my summary of UMC results for the third quarter 2013. More details are available in the report, which has been posted on our website. I will now turn the call over to Mr. Yen, CEO of UMC.

Po

Okay, thank you, Chi Tung. Good day everyone. I would like to update UMC’s third quarter operating results. The foundry segment recorded NT$31.6 billion in revenues, with profit margin from foundry operations of 9%. And wafer shipments hit an all-time high of 1.329 million 8-inch equivalent wafers, bringing overall capacity utilization to 87%. The new business segment recorded NT$1.83 billion in revenue. 40-nanometer business continues to grow and accounted for 20% of sales in the third quarter 2013. During the last couple of quarters, the engineering group has progressed relentlessly on deal enhancement activities to improve our 28-nanometer manufacturing technologies. These accumulated efforts enable 28-nanometer poly-SiON and High-K/Metal Gate yields to accelerate this climb. This accomplishment allows us pre-production customers to shift closer towards volume production and concurrently shortens the time required for new customer adoption of UMC’s 28-nanometer platform. In the upcoming months, we look forward to further optimizing 28-nanometer yield levels to move more customers towards volume production. In terms of specialty technologies, UMC continues to lead the foundry sector in high-voltage manufacturing processes used for applications such as driver ICs in mobile devices. Our unique high-voltage technologies increase our customers’ competitiveness. So they may further gain market share in today’s growing display industry. For the fourth quarter, we have seen a decline in wafer demand. Primary factors that lead to a weakened outlook stems from seasonal correction, and supply chain inventory control and the uncertainties culminating in the macro economy. We firmly believe UMC is well positioned to benefit from the robust 28-nanometer demand in the mobile industry for the next several years. To secure long-term foundry growth, UMC continues to deploy our advanced logic and mixed mode and specialty derivative technology offerings. UMC’s diversified product portfolio will enhance our manufacturing flexibilities. To accommodate additional customer production requirements, broaden our business scale, and solidify our position as one of the leading players in the foundry industry. I am now moving to fourth quarter 2013 guidance. Our fourth quarter 2013 guidance are as follows; the Foundry segment wafer shipments will decrease 8% to 10%. Foundry segment ASP will decrease by approximately 2%. UMC’s operating margin to be approximately break-even for the Foundry segment. Capacity utilization rate for the Foundry segment will be in mid-70% range. 2013 CapEx for Foundry segment will remain unchanged at $1.5 billion U.S. Guidance for New business segments’ revenue will be approximately NT$2.2 billion and operation loss will be approximately NT$515 million. That concludes my comments. We are now waiting for questions. Operator, please open the lines up. Thanks.

Operator

(Operator Instructions) The first question is from Randy Abrams, Credit Suisse. Please ask your question.

Randy Abrams

Yes, good evening. My first question, I wanted to ask on the 40-nanometer, how much continued momentum are potential for an additional or second wave business if you expect that to continue to improve as a percentage of sales and factored into the small ASP decline, is that due to product mix where perhaps 8-inch or order nodes are holding more than the 40-nanometer into fourth quarter?

Chi Tung Liu

Yes, our 40-nanometer business has been a steady contributor and continues to be around one-fifth of foundry business. So in today’s environment, UMC has not felt too much pressure on 40-nanometer business.

Randy Abrams

Okay, do you expect continued, like another second wave or that will grow from the current 20% or with the incremental growth now be 28-nanometer as you look into the next year.

Chi Tung Liu

Yes, I would say the second wave which will have a great opportunity to grow our 40-nanometer revenue share and I think it still continue to grow in the coming quarters.

Randy Abrams

Okay, and I wanted to ask on the CapEx, with utilization falling to 75% by fourth quarter, how should we think on initial view of CapEx if the NT$1.5 billion is the right rough level for spending or if where utilization is can you bring that down into next year? Or you need to invest to bring up 28 more 40?

Po

Randy, maybe I can answer this question. Our cash flow pretty much can support NT$1.5 billion-ish CapEx per annum without any additional funding requirement. So NT$1.5 billion is always our baseline and if we can do better in terms of the technology development in terms of schedule we can do a little bit more than that and on the vice versa. So NT$1.5 billion is the number we feel comfortable financially and that's the number we will be using as a benchmark in the near future.

Randy Abrams

Okay, and my last question just two areas, one, Japan, it took a step up, maybe is that a one-time bump or do you expect some continued incremental IDM or business from Japan and if you could give a sense, where you talked on specialty and high-voltage, just where that’s add per percent of revenue now?

Chi Tung Liu

Our Japan, the business flow is mainly coming from – not from high-voltage chips from ISPs.

Randy Abrams

Okay. Do you expect, I mean, that jumped from 3% to 6%, is that a new level or even a level you see a project continuing to grow where it’s been low single-digit for a number of years, but is there finally more potential for outsourcing the continued growing there?

Chi Tung Liu

It depends on our customers’ their business situation, it depends on end-customers’ demand. So, it was not one-time jump, we expect to continue to maintain the business flow in Japan.

Randy Abrams

Okay. Now that’s good and the specialty process as a percent of revenue is from specialty and high-voltage?

Chi Tung Liu

Yes, our high-voltage is around 40% of our total specialty revenue.

Randy Abrams

Okay and specialty as a percent of total sales?

Chi Tung Liu

It’s around 30% of UMC’s total revenues.

Randy Abrams

Okay, great. Thanks a lot.

Po

Thank you.

Operator

The next question is from Steven Pelayo from HSBC. Go ahead please.

Steven Pelayo

Great, thank you. Just a reminder on 28-nanometer, I think before you were talking that first few percentage of revenue by the end of the year. Is that still what it’s tracking to? It sounds like you are making great improvements on yields and can you maybe also provide some color on number of tape-outs or number of customers. How much is initially going to be a poly-SiON or do you have some initial High-K/Metal Gate as well. Could you just give us a little more detail on 28-nanometer both in terms of qualitative as well as quantitative in the mix over the next quarter or so?

Chi Tung Liu

Yes, our 28-nanometer production has started to gain some momentum and however we still maintain 28-nanometer revenue share will be in low single-digit target at the end of 2013 and…

Steven Pelayo

And any more details on number of customers or number of tape-outs or anything else you can provide some insight?

Chi Tung Liu

Yes, we already engaged more than 20 customers, on 28-nanometer nodes. And more than – greater than 30 product tape-outs, yes, so far and about five, more than five products in pre-production stage. Yes.

Steven Pelayo

Okay, excellent. I guess I want to follow-up a little bit on Randy’s question. He was asking a bit about ASPs being down in the fourth quarter, 2%. So, obviously 28-nanometer or anything of that should be good for ASPs. So, maybe you could talk a little bit about what’s going on and why ASPs are down in the fourth quarter? Is this on a like-for-like basis? Is it product mix? Can you help us understand the ASP decline in the fourth quarter given 28-nanometer starting?

Chi Tung Liu

Yes, I think, it’s mainly due to the shipments it’s dropped more in 12-inch wafers. So, it’s less on 28 wafer shipments that caused our ASP drop. That is the main reason.

Steven Pelayo

Okay, and I know you guided for the fourth quarter mid-70s utilization rate, does that then imply that your 300-millimeter utilization rates are in the 60s or maybe you could talk a little bit about what that means from a 200-millimeter versus 300-millimeter given the mid-70s blended average? Yes, our 12-inch wafer, our Fab the loadings are greater than 70% in the low 70% range and 8-inch is around 80%, greater than 80% range.

Steven Pelayo

Okay, and last question from me is, just, I am curious on your 40-nanometer margins, you talked about it, revenues continuing to maybe grow from here next year. Is the margin for 40-nanometer already above kind of your blended average there 22% for gross margins?

Chi Tung Liu

No, I mean, majority of the inch facility have been fully depreciated. So for most of the new investments, from an accounting margin point of view is very difficult to compare. So, it’s not to the compared average yet in terms of 40-nanometer margin.

Steven Pelayo

Is that, do you think just a capacity thing, or timing thing or volume, when would you expect 40-nanometer to not be a drag on your margins, I guess?

Chi Tung Liu

Again, back to the accounting margin, we may have to be to the end of the depreciation schedule which in our case is about five years.

Steven Pelayo

Okay, understood, understood. Well, great. I’ll get back in line. Thank you.

Chi Tung Liu

Thanks.

Operator

(Operator Instructions) The next question is from Eric Chen, Daiwa. Go ahead please.

Eric Chen

Yes, my first question regarding to the 28-nanometer process. I would like to know when we will see the revenue and over 5% of the total revenues and also I would like to get an idea the capacity and I remember you so far you gone along 10,000 wafers in per month for the 28-nanometer process. And so do you have plan as at end of the second quarter or kind of the capacity we should expect?

Chi Tung Liu

Eric, maybe I can jump in here. For 28-nanometer, we still stick to our previous target which is low single-digit by the end of this year. So, hopefully, if everything goes well, we see low single-digit quarterly revenue in Q1 next year and beyond that, it’s really difficult to predict. So I cannot really commit here, when we are going to see the 5% growth in revenue. Of course, from a management’s viewpoint, it’s soon as the better.

Eric Chen

Okay, how about the capacity-wise?

Chi Tung Liu

Our capacity, I mentioned the 10,000 wafer per month existing 2013 and our capacity target will depend on the results of our engineering collaborations as well as end-market demand.

Eric Chen

Okay, so in that case, do we need to expend a high CapEx for next year, once your 28-nanometer – also a commercial achievement and the catch of the first half of next year?

Chi Tung Liu

Our CapEx number for next year will be announced or disclosed within the next yearnings call. And as I mentioned earlier, our baseline CapEx is slightly depends on our free cash flow which is at the current condition is around $1.5 billion U.S. and if we see greater opportunity of course, we will be more aggressive. So, at this point, we will plan our capacity based upon multiple factors including the cash flow.

Eric Chen

Yes, very clear. And in that cash, the baseline at $1.5 billion U.S. and let’s assume that $1.5 billion U.S. as a CapEx. How big the capacity for the 28-nanometer process will be, I said, per month in the second half of next year?

Po

Well, it’s hypothetic, also it’s difficult for us to answer, I mean, it’s better than us that how much it cost for 1K 28-nanometer 8K capacity. So you can do a quick calculation. But we also have other things to take care of, for example, we are converting some of our cover base inch capacity to aluminum. We are also installing additional 40-nanometer capacity in our Singapore facility and on top of that we are finishing up our new shell in Taiwan Science Park. So they all consist as part of CapEx.

Eric Chen

Okay, I see, okay and the last question regarding to the region and could you give us a highlight in terms of the capacity there? Or any of the expansion applying in the region. Thank you.

Chi Tung Liu

Yes, our region sales is currently is 45,000 wafers per month and we are expanding up to 50,000 wafers per month by the end of this year.

Eric Chen

Okay, what kind of products are made in the region right now, is driver IC or what else?

Chi Tung Liu

Yes, correct.

Eric Chen

Okay, driver IC mainly.

Chi Tung Liu

Yes, mostly, driver IC, yes

Eric Chen

Yes, by the way, you talked about the driver IC where it will be the high growth product, what kind of geometry, I mean, for the UMC to gaining the market share? What kind of geometry do you (inaudible) and also in terms of revenue contribution, the main geometry for the driver – what’s the main geometry for the driver IC? Thank you.

Chi Tung Liu

Yes, we – yes, because that demand situation, there are some changes, so, from the weak trend arising to the IC, so the recent change, because our demand moved to a legacy nodes, technology nodes. So, I probably not go into details of the technology nodes. But anyway, this is a big trend here.

Eric Chen

So, geometry, my question?

Chi Tung Liu

Yes, this is mainly to 0.11 micron.

Eric Chen

Okay, and that’s other major geometry for the driver IC?

Chi Tung Liu

Yes.

Eric Chen

Thank you very much. I am sorry?

Chi Tung Liu

Yes.

Eric Chen

Okay. Thank you very clear. Thank you.

Chi Tung Liu

Thank you.

Operator

The next question is from Donald Lu, Goldman Sachs. Go ahead please.

Donald Lu

Thanks. My first question is on depreciation, if your CapEx is on the baseline next year, can you give us a sense on how much depreciation will be increased year-over-year next year or decrease the number?

Po

It will be increased about, less than 10% from this year.

Donald Lu

So less than 10% year-over-year next year.

Po

Increase.

Donald Lu

Increase? Okay. The second question is on the R&D spending. How much percent would that be as your revenue or if there is any guidance in terms of the intensity there? Remember in the last call, you commented it might increase.

Po

Current condition includes the 10-nanometer since that development with IBM and this project should be concluded by the end of next year. So, from now to the end of next year it would be the current condition current percentage and hopefully we see some minor decrease beyond the end of 2014.

Donald Lu

Okay, so the R&D as a percent of revenue would be the similar percentage as in Q3 or Q4 level in next year?

Po

Q3, Q4 will be very similar.

Donald Lu

Similar as a percent?

Po

Yes.

Donald Lu

Okay, okay. And, yes, just relating to that, in Q4 your guidance is for operating loss is that all from the new business or and you think…

Chi Tung Liu

Only it is break-even, I think we were been talking about. And including new business, it probably will be very minor, very small operating loss if we include the solar investment, yes.

Donald Lu

Okay, so that's the guidance, the small loss would be from the solar business?

Chi Tung Liu

Yes.

Donald Lu

Okay, and how is the revenue trend for the solar business?

Chi Tung Liu

Yes, in our presentation, we give a number of flattish, small increase around NT$2.2 billion in Q4.

Donald Lu

Yes, I see, okay great. Thank you.

Po

Thank you.

Operator

(Operator Instructions) The next question is from Bill Lu, Morgan Stanley. Go ahead please.

Bill Lu

Yes, hi, good afternoon. Going back to your guidance for the fourth quarter, you are guiding for breakeven for the semi business and I am not sure if my math is right, but it seems to imply a gross margin in – roughly the mid-teens and you also said that 12-inch the margin is lower, is that dropping little bit faster than the 8-inch? So it seems to me like margins shouldn’t have a drop that much if it’s only utilization rates. Can you talk about what are some of the reasons behind that? Is it, 28 and 40, ramping? Or what exactly is causing that?

Chi Tung Liu

I think, first of all, the currency is moving against us. So, NT dollar have appreciated quite significantly over the past few weeks. And we will also see a steep drop mostly due to 8-inch drop in shipment and our depreciation continue to increase and so the electricity utility cost in Taiwan. So altogether, the cost structure is getting a little bit worse in the fourth quarter.

Bill Lu

Okay, thanks, that’s helpful. You talked about seeing additional opportunities at 40-nanometers going into 2014 as far as share gains. Can you help me quantify that, how much can 40-nanometers grow year-on-year next year or what is it, as a percentage of revenues? How you want to quantify this line?

Po

Yes, we do see there a second wave of customers, their demands is still there and their peak revenues peak demand is in 2015 and 2016 timeframe. So we will continue to see to engage with those customers to grow our 40-nanometer.

Bill Lu

May I ask it little bit differently, if you look at the second waver is and the size of the opportunity there versus the opportunity for the first waver is, what is the difference?

Po

I’m quite…

Bill Lu

Just in terms of the number of wafers that’s required in the second waver versus the first wavers?

Po

Yes, for this, the second waver is some – scale, still it’s pretty big and it’s not small, it’s a very big compared with the first waver.

Bill Lu

So similar in scale?

Po

In total, second waver partly very similar scale.

Bill Lu

Okay, that’s very helpful. And then the last question is, I wonder if you have visibility into the first quarter of next year. Just given that I think actual vacation is there, we are going through a inventory correction, but that’s potentially coming to an end. You are ramping 28, 40 and these look pretty good. How does the first quarter look?

Po

Well, it’s quite difficult to provide an answer on the first quarter next year during the end of October. So it will be important for us to tune into the market and pay attention to see the trend. So we’ll need more time to observe the first quarter 2014’s outlook.

Bill Lu

Okay, great. Thank you very much.

Po

Thank you.

Operator

The next question is from Szeho Ng BNP, go ahead please.

Szeho Ng

Yes, the company – turning to net debt in Q3, so I just want to know what sort of financial gearing UMC is comfortable with?

Chi Tung Liu

Debt-to-equity ratio level is around 30%, which is current condition right now. So we would like to stay around 30% for the foreseeable future.

Szeho Ng

Okay, all right. And then for the tax earned, I just want to know, what sort of number would be appropriate for marketing purpose going into 2014 and 2015?

Chi Tung Liu

Well, eventually the corporate tax is 17% and we still enjoy some kind of tax benefit. So I think from the current point to maybe two three years’ timeframe, eventually it will go up to 17%. Right now, I would say, 15% or so is probably the number for modeling.

Szeho Ng

Okay, all right. Thank you. And last question with regard to your margin guidance for Q4, you incorporate any one-off items in it or it’s purely just the normal one?

Chi Tung Liu

It’s just the normal one, nothing one-off.

Szeho Ng

Okay, all right. Okay, thank you very much, Chi Tung.

Chi Tung Liu

Thanks.

Operator

The next question is from Dan Heyler, Merrill Lynch. Please ask your question.

Dan Heyler

Yes, thank you for taking my question. Chi Tung, I had a question on the R&D comments that you made relatively – I think you said relatively stable in 2014 versus the second half of this year R&D as a percentage of sales. How are you accounting for the IBM project? Is that amortized on a quarterly basis and if so how many quarters is that affecting the R&D number?

Chi Tung Liu

As I mentioned, the whole project will be concluded by the end of next year. So, the impact will be evenly distributed every quarter until then.

Dan Heyler

Okay, excellent. And then on the capacity comment that you made for – I know it’s early to make a call on needed capacity for 2014 because that depends a lot on your 28-nanometer yield improvements are not. Do you have any thoughts though on the specialty business? How much capacity do you think you need to add there? Specifically, would you be interested in adding 8-inch capacity for specialty you would be adding 12-inch capacity for specialty? Maybe, just give us some update on the specialty capacity requirements and whether you need to add wafers or not?

Chi Tung Liu

Yes, for 2013, our capacity expansion on specialty in terms of the 8-inch wafer is around 9% of our total CapEx. So it’s 91% on 12-inch wafers.

Dan Heyler

Have you added any capacity at all on that 9% or is that all process-related?

Chi Tung Liu

Yes, as I just mentioned, we added our 8-inc Fab at least from current 45,000 wafers per month to 50,000 wafers per month.

Dan Heyler

All right. Okay, and will you add more next year for 8-inch and if so how do you look it, maybe acquiring used equipment from IBM or how aggressive do you want to be in 8-inch?

Chi Tung Liu

The Board has actually passed a resolution or agenda that asking the management team to find some instant capacity in Asia, either 8-inch or 12-inch, mostly trying to fulfill the demand for specialty. But, there is no definite schedule on that kind of search. So we are still looking for opportunities out there, but not really limited to any possibilities.

Dan Heyler

Okay, and within your 8-inch specialty process, are there and if so how much can that be moved to 12-inch? Are there any areas where you are seeing, many product areas that will be moving from 8-inch to 12-inch specifically, maybe you could tell us high-voltage or areas we could create more capacity on 8-inch if you needed to.

Chi Tung Liu

Yes, it’s just – like you mentioned, the high volumes, there some capacity will migrate from 8-inch to 12-inch, 55-nanometer technology and there are some from embedded and non-volatile memory products also will migrate to 12-inch technology.

Dan Heyler

Okay, so is that what’s creating your – is that's what’s creating your demand for 40 is that you have customers that are mostly migrating from 65 to 40. Is that where the majority of your first wave adoption is coming from? Is it the migration from 65 to 40?

Chi Tung Liu

Yes, but it’s not majority, but it’s definitely have some contribution.

Dan Heyler

Okay, so you will be able to use your excess 65 capacity, you will be able to use that for high-voltage, is that right?

Chi Tung Liu

Yes, correct.

Dan Heyler

Great, okay. And then when you talked about second wave adopters, I was just trying to understand what you are referring to, I mean, usually this is just the people on 65 that haven’t migrated forward. Is that what you are anticipating as, lot of your 65 now coming forward to 40, is that what you are referring to on second wave adopters?

Chi Tung Liu

Yes, correct, yes.

Dan Heyler

Okay. Great. Thank you very much. That’s it for me.

Operator

The next question is from Aaron Husock, ShearLink Capital. Go ahead please.

Aaron Husock

Great, thanks for taking my question. Could you clarify on your R&D expense, why it wasn’t down compared to Q2, given that Q2 had the 28-nanometer startup cost in the numbers?

Chi Tung Liu

When we joined the IBM core development program for 10-nanometer thin Fab and that program won’t be concluded until the end of 2014. So each quarter, we will have to pay some payment to this joint development. So that’s the reason for the next few quarters, until the end of 2014, our R&D expenses will stay at the current level.

Aaron Husock

Okay, great. And then your depreciation in cost of goods sold was down sequentially, can you help me understand why depreciation went down and how you are thinking about depreciation in Q4?

Chi Tung Liu

Well, first of all, our depreciation for the whole year 2014, should be less than 10% growth than that of 2013. That’s for quarter-over-quarter movement, sometimes you have older this equipment, the depreciation has expired. So quarter-to-quarter, it’s more difficult to predict. But Q3 in 2013, the depreciation expenses is probably the lowest quarter of the year. And going forward the next few quarters, we will see minor quarter-over-quarter increase in depreciation, but more importantly, 2014 according to current forecast, we are seeing some – less than 10% increase year-over-year.

Aaron Husock

Okay, great. And then just to clarify on 28-nanometer, I know, your pre-production customers, but can you just tell us, if today, right now, your end-volume production with the new one for 28-nanometer outside of the one customer move who there is a small volume for a while?

Chi Tung Liu

Because the number of customer is rather limited, I think we won’t be able to tell too many details, but I guess, all we can say is we stick our original target that low single-digit production at the end of this quarter and hopefully quarterly revenue we see low single-digit in Q1 next year.

Aaron Husock

Okay, great. Thank you.

Chi Tung Liu

Thanks.

Operator

The next question is from Andrew Lu, Barclays Capital Research. Please ask your question.

Andrew Lu

Thank you. A couple of quick questions. First one, demand outlook regarding Q4 based on your guidance, what kind of applications are declining more than others?

Po

Almost each sector, it’s consumer, communication and computer. But for the sub-sector, yes, for the consumer sector, there are some DTV Set top-box, DSP products they are declining and for the big supply it’s the communications, the base band and ISP products also are downwards and for the computer it’s the touch and flash controller products.

Andrew Lu

So, can we say the consumer is worse than the – communication and communication worst that the PC?

Chi Tung Liu

It’s quite even and, but of course that communication is a particularly most of the portion of our revenue share. So, from the absolute numbers, communication were downwards, more serious than others.

Andrew Lu

So, in terms of percentage, which one has a larger decline?

Chi Tung Liu

It’s pretty even.

Andrew Lu

Even? Thank you. The second one is on the solar business, you are guiding actually increasing on the solar revenue to NT$2.2 billion. But losses seems expanding. Do we have any idea that solar business can turn any more break-even level in the next few quarters – within the next few quarters? But it will remain at this kind of losses for quite sometime.

Chi Tung Liu

It’s difficult to predict and we have been pushing really hard on all those solar entities and the situation has especially improved quite significantly if you compare to 2012. So we hope, for next year, we will see continuous improvement and as for when we can see profits, sort of more – it’s sort of little bit difficult to predict right now.

Andrew Lu

Thank you. The last one is the break-even utilization rate, based on Q4, the guidance pretty much break-even utilization roughly about 70% quite similar to Q1 this year. But worse than year 2011 Q4. In that high break-even utilization is about 67%. Do we expect any improvement on this break-even utilization to be lower in future for the next downturn and what are we going to do to make this happen?

Po

Andrew, as you know that, our 28-nanometer capacity is not very well utilized at the moment. And that’s the main reason for the higher breakeven point level and we saw our engineering progress on 28 is improving significantly we hope very low utilization rate on 28-nanometer equipment can be improved as well. So, hopefully this is a short-term phenomenon through our improvement in the leading-edge capacity node, you can note our break-even point should be able to come down from the current level.

Andrew Lu

Very helpful, thank you.

Po

Thanks.

Operator

The next question is from Roland Shu, Citigroup. Go ahead please.

Roland Shu

First I have question for the solar, since this is about a 2% of your total revenue, however losses are at 17% of the (inaudible). Is there any plan for you to tell me this, new business in the solar in the near term?

Po

We have already stopped expanding any solar related capacity for quite some time. All the forecast for the past 18 months has been putting on the efficiency and capital reserves. So, first of all we will not expand the solar capacity and secondly, as I mentioned earlier, the performance from a loss-making point of view has reduced quite significantly compared to that of 2012. So we are continuously looking for opportunities for internally or externally to improve the efficiency of the solar operation. So, again for the 2014, we will see a better performance coming from our solar investments.

Roland Shu

But, 2014 I think probably would be still loss-making on the solar business?

Po

In the near-term, yes.

Roland Shu

Okay, okay. Second question is from the competition in China, I think there is a new foundry in China called (inaudible) I think this new – I think their core product is that doing 55-nanometer specialty IC for using on the high-voltage technology and even for ICs. I think these are actually the direct competition with your specialty IC. For that actually, are you seeing any pricing pressure or any competition from these newcomers in China?

Po

I think in high-voltage industry, our technology that is in the lead position and of course we feel the pressure from China’s competitor but, yes, I think, UMC was in the lead position on this area.

Roland Shu

Understood. For your 4Q you guided ASP to decline slightly and is there any reason or correlation with the competition from China?

Po

It’s mainly because of our product mix, it’s that less shipment on 12-inch wafers, because of the end-customers getting demand.

Roland Shu

Okay, thank you.

Po

Thank you.

Operator

The next question is from Michael Chou, Deutsche Bank. Please ask your question.

Michael Chou

Hi, good afternoon. I have several questions. First one is, regarding your currency, could you give us what is the expectation for Q4? And then what is your currency in Q3? Thank you.

Po

In Q3, it was around 29.7 or 29.65, something like that and up to date, it already appreciates more than 1.6% and we cannot predict the future in terms of currency. So, in our guidance we have excluded the impacts on the currency movements.

Michael Chou

Thank you. Okay, the second question is, do you still maintain the guidance of the – some 28-nanometer High-K Metal Gate revenue from Q2 next year?

Po

We didn’t recall we have said that, we said 28-nanometer High-K Metal Gate will be – maybe two three quarters after poly-SiON and we are seeing the take-off of pre-production of 28 poly-SiON by the end of this quarter and so, we didn’t recall we give a Q1…

Michael Chou

Yes, because you mentioned before two to three quarters. So, can we expect you have some revenue from Q2 next year?

Po

Yes, I – we expect that our High-K Metal Gate will be in the second half, yes, it will be second half

Michael Chou

Okay. In that case, would you shift your capacity from Poly-SiON to High-K Metal Gate next year or you will increase the total 28-nanometer capacity as well?

Chi Tung Liu

Well, mainly we will increase our total 28-nanometer capacity and of course we will focus on High-K Metal Gate version.

Michael Chou

Okay, given that the challenging High-K Metal Gate is more – it should be more difficult than poly-SiON right? So if your poly-SiOn revenue could be just low single-digit in Q1, how can we – how do we think about high-K metal gate revenue trend going forward? Can you give us some color? Thank you.

Po

I would say it's actually, our High-K Metal Gate, we have two versions. And, one of the High-K Metal Gate version is actually doing quite well in terms of yield achievements. So, yes, it quite depends on that – the customers, the end-customers' demand. We already – yes, our High-K Metal Gate versions, one of the version we already achieved more than 80% yield. So this one, we expect that there are some businesses in the second half of next year.

Michael Chou

Okay, thank you. Okay, my final question is, is it possible you give us some guidance for 28-nanometer capacity by the end of next year?

Chi Tung Liu

Michael, as I mentioned, we don’t have the number for capacity next year yet, it will be available next quarter and even you use our baseline of NT$1.5 billion, you can do a rough calculation according to how much it comes per 1000 wafer capacity and also I have mentioned we have other things need to spend money as well including specialty, 40-nanometer and our P5, P6 shell.

Michael Chou

Thank you. I have no more questions. Thank you.

Chi Tung Liu

Thanks.

Operator

The last question is from Steven Pelayo, HSBC. Please ask your question.

Steven Pelayo

Great, just a couple of follow-ups here. With shipments down 8% to 10% in the fourth quarter, and R&D relatively stable, how much flexibility do you have in your SG&A? Can that also come down by 8% to 10% quarter on quarter or are some of that kind of sticky if you will?

Chi Tung Liu

SG&A to come down 8% to 10% is rather difficult. And we have some – as always, cost control scheme, mostly for Fabs including possible impairments and so, altogether, we will continuously bring down our production cost. But for SG&A, with the increased utility cost it’s very difficult.

Steven Pelayo

Okay, so I want to see that significant. And then I know in the third quarter you do expect or you receive a lot of these non-operating incomes from your investment portfolio, but it makes it very unpredictable quarter-to-quarter. Do you have any initial thoughts on the non-operating income contribution for the fourth quarter?

Chi Tung Liu

Q4, you can put in that zero for now.

Steven Pelayo

Zero? Okay. And last question, SMIC is talking a lot about specialty as well. I think it's also got 30% of revenues for them. It really seems like a strategy for them they want to drive and grow that significantly as a percentage of their mix as well. Is that something you envision UMC doing as well, a year from today will we be talking and that 30% of revenue will be 40% or more? Help me understand is specialty going to be a bigger growth driver than the overall top-line, so it's kind of a barbell if you will 28-nanometer on the leading-edge and specialty kind of on the trailing edge? Can you help me understand the mid-term thinking on specialty growth?

Chi Tung Liu

I would say it will be more steady, steadier as a percentage.

Steven Pelayo

Okay, so it may stay steady as a percentage? Okay. Okay, and if I just sneak in one more just – SMIC also seems to be finally starting to ramp 40-nanometer as well. I am curious any increases or any changes in pricing pressure and that that’s potentially driving some of your guidance? I know you talked about being primarily mix-related, but I’m curious on a like-for-like basis, given more time stand by, more competitors are offering 40-nanometer now, are you seeing any more intense pressure there?

Chi Tung Liu

Yes, I think the – we haven’t felt too much pressure on the 40-nanometer business. So…

Steven Pelayo

Okay, then I'll just ask one last question. You talked about five products at 28-nanometer in pre-production. I'm curious, is that from a wide range of segments or they are primarily communications related? Maybe you can talk in a little bit more detail on what types of products they are. But help us understand who are the – these initial five products what type of areas they come from?

Po

It's a wide range. It's not only from communications. They are from some others. Yes.

Steven Pelayo

Okay, it’s quite a bit abreast there. Excellent, thank you very much.

Chi Tung Liu

Thank you.

Operator

Thank you for all your questions. That concludes today’s Q&A session. I will turn things over to UMC Head of Investor Relations for closing remarks.

Bowen Huang

We appreciate you following us and that we are going to work hard on your behalf. Thank you very much. Thank you and thank you for joining us for our third quarter earnings conference call today. We will speak with you on the next quarter. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir@umc.com. Thank you again and have a good day.

Operator

Thank you, ladies and gentlemen. This concludes our conference for third quarter 2013. Thank you for your participation in UMC’s conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investor Relations Investor Events section. You may disconnect now. Good bye.