UMC 联华电子

Operator

Welcome everyone to UMC’s 2013 Fourth 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 the 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 UMS. Mr. Huang, you may begin.

Bowen Huang

Thank you and welcome to UMC’s conference call for the fourth quarter of 2013. I am joined today by Mr. Po-Wen Yen, the CEO of UMC and Mr. Chi Tung Liu, the CFO of UMC. In a moment, we will see our CFO present the fourth quarter financial results followed by our CEO’s key message to address UMC’s main area of focus and the UMC’s first quarter of 2014 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 fourth quarter 2013 business results.

Chi Tung Liu

Thank you, Bowen. For the fourth quarter of 2013, revenue was NT$30.72 billion with a gross margin at around 18.1%, and operating margin at 0.6%. Net income attributed both to the stockholders of the parent, was NT$0.75 billion. And the earnings per ordinary shares were NT$0.28. And now I would like to go through our financial PowerPoint file, to go through the Q4, last year’s performance. If you turn to page three, I briefly mentioned all the key numbers. As you can see, there are NT$30.7 billion revenue in Q4 last year, was around 8% decline on the third quarter of 2013. And the cash on hand at the end of Q4 2013 is NT$50.8 billion. Utilization rate for Foundry segment for Q$, was 79%. On page four, you can see our income statement quarter-over-quarter comparison with 8% revenue decline. Our gross margin, gross margin rate also declined by approximately 4 percentage point to 18.1% which is around NT$5.5 billion. Our operating expenses shows some growth around 8.6% mainly to due increasing R&D activities. And we also booked about NT$889 million non-operating income in Q4 last year, mainly coming from our disposal of UMC Japan equity stakes. So the net income for Q4 last year was 588 million and the net income attributable to parents, is around NT$749 million. On page five you can see the year-over-year comparison. Revenue grows 7% year-over-year to NT$123 billion. Gross margin also grow 22% to 23.5 billion. On a consolidated basis including Hogin [ph] starting from February of 2013 and also the increasing R&D activity, our operating expenses, also grow 23.9% to 19.4 billion for the whole year of 2013. The total net income for 2013 was NT$12.6 billion and EPS is 1.01 and EPS per ADS is USD0.169. The next – on the next page, page six, again, our cash is slightly over NT$50 billion with total FS in the range of around USD10 billion. On page seven, you can see the breakdown between our Foundry operation as well as the new business. The new business in Q4 still cause a loss around NT$670 million, while Foundry operation is profit around 778 million. And for CapEx in Q4 last year for Foundry, is around NT$7.6 billion. On page eight, the ASP trend was down around 2% in Q4 last year. On page nine, we have further breakdown for our Foundry segment. First of all, it’s a geographic breakdown. As you can see, the Asian, probably show the biggest change from 44% last quarter, to 41% in Q4. And U.S. market on a contrary, grow to 47% from 43% in the previous quarter. On page 10, the whole year breakdown, doesn’t really show much difference, post agent and U.S., representing around 45% of our total revenue. On page 11, Q4 will continue to see IDM represent less part of our total revenue which declined to 11% in Q4 from 14% in Q3. And for the whole year, it shows the similar trend from 15% in 2012, to 11% in 2013. On page 13, we can see the communication decline to 49% of our total revenue in 4Q ‘13 from 52% in 3Q. And consumer grow from 28% [ph] to 71%. And for the whole year data on page 14, communication remain the same, around 50% of our total revenue of 2013 and 2012. Technology breakdown on page 15, we continue to see 40% represent a larger part of our revenue. In Q4, it continued to grow to 24% from 20% in the previous quarter – 55-nanometer or below, now it’s representing around 53% of our total revenue in Q4, 2013. On page 16, the full year figures, 40-nanometer also represent 20% of our total revenue which is almost double from 11% in 2012. And 65-nanometers still remain our biggest portion which is around 32%. On page 17, we can see our quarterly capacity increase. Here’s the table for your reference. And quarter four, we see some minor increase around 1% in total capacity. And for Q1 this year, due to less working days, so the increase is a lot smaller. On page 18, our planned budget CapEx for 2014 is currently stay around USD1.1 billion to USD1.3 billion with majority around 90% for 12-inch capacity extension, as well as for some capacity upgrade. So the above, is a summary of our results for Q4 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. Hello, and happy new year to everyone. I would like to update UMC’s first quarter operating results. The Foundry segment recorded NT$28.58 billion in revenues with profit margin from Foundry operations of 2.7%. And wafer shipments reached 1.236 million, 8-inch equivalent wafers bringing overall capacity utilization to 79%. During the first quarter of 2013, our 40-nanometer and below, this is represented 24% of UMC sales. This continued growth demonstrates the strengths of our 40-nanometer technology platform which has been adapted by numerous customers from a wide range of diversified markets. We also continue to achieve new milestones for our specialty technologies recently, surpassing 50 million IC shipments for our 55-nanometer embedded [ph] high voltage process in just one year. Our engineering teams, have further miniaturized the HM shell [ph] for this process to power – highest resolution smartphones. Continuously pushing the boundaries of specialty technologies in 55-nanometer and beyond. Both 28-nanometer, we have made significant strides on our 28-nanometers status to become a competitive foundry supplier, most of it by enhancements and has helped us secure additional design wins. To further strengthen our 28-nanometer design platform, we now offer ARM, artisan physical IP for our 28 HLP, UMC’s 28-nanometer, high performance low power process that optimally balances byte size, speed, and leakage performance to target low power applications. This collaboration adds ARM’s POP IP core-hardening acceleration technology. Shorten time to market through proven rigorous silicon validation for our customers designing into 28 HLP. For the first quarter, we anticipate softer sales [ph] due to normal early year seasonality. In 2014, we are optimistic that UMC will benefit from product design wins across a broad spectrum of the semi-conductor industry. We will leverage our manufacturing excellence and deploy capacity expansion, not only for 28-nanomater High-K/Metal Gate lines. And also for upgrades, if our 8-inch and 12-inch Fabs, will fulfill emerging requirements, as such, UMC’s CapEx for 2014 will be approximately USD1.1 billion to USD1.3 billion. These investment will help UMC to extend the economies of scale to drive down manufacturing costs and achieve a prolonged structural increase in productivity. These efforts will prepare UMC’s market share growth in leading edge technologies, and further expand our presence in the specialty segment, strengthening our position in foundry industry. And now, I would like to translate these highlights in Mandarin. (Foreign Language). Now I have finished my remarks. And let me provide you with the first quarter of 2014 guidance. The foundry segment, wafer shipments will show a marginal increase. Foundry segment SP in U.S. dollar, will decrease by approximately, 4%. UMC’s Foundry segment gross profit margin will be in mid teen percentage range. Capacity utilization [ph] rate for foundry segment will be high 70% range. 2014 CapEx for Foundry segment will be in the range of USD1.1 billion to USD1.3 billion. Guidance for new business segments, revenue, to be approximately, NT$2.8 billion, and operating loss will be approximately, NT$0.5 billion. That concludes my comments. We are now ready for questions. Operator, please open the lines. Thanks.

Operator

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

Randy Abrams

Okay. Thank you. My first question on the CapEx, I think originally, the range was 1.5 billion, and it looks like you spent 1.1 in guided 1.1 to 1.3 billion. If you could talk about the decision to take a more conservative view on CapEx, and would have been price for amount of additional capacity versus specialty, and then the depreciation implication from the lower CapEx?

Chi Tung Liu

Randy, our CapEx decision is based upon our own suspendable [ph] cash flow as well as the customer need. And with some of the CapEx using for upgrade, the total available capacity can be achieved with a small amount of budget. So that’s one reason. And second reason is of course, you can probably notice that the 20-nanometer [ph] is a little bit slower than what we expected. So the immediate need for additional 20-nanometer [ph] capacity is less now. But still, we will continue to follow the need for our customers. And again, as I mentioned, some of the upgrades for capacity, actually cause less for new capacity. So seeing it all together, it cost the numbers to be probably smaller than how you expected.

Randy Abrams

Okay. And the depreciation implication for 2014, like how much it may increase?

Chi Tung Liu

Still the same, probably less than 10%.

Randy Abrams

Okay, thanks. And I have a question on the ASP guidance for the down, 4%. If you could talk about how much is from the normal, I think beginning of year, there’s a price reset, but also if there’s change in product mix, how, say, 28 and 40 may look relative to the 8-inch if it’s a function of product mix?

Po

Yes – the ASP will decline across 4% in the first quarter due to the product mix, yes. For the first quarter, our guidance, below our – some average, so it looks like that.

Randy Abrams

Okay, thanks. And then the final question, the new business sales in your guidance continue to move up. It looks like doubling versus where it was a year ago. If you could talk about the drivers of the revenue strength? And for the profitability, maybe the source where the loss is, I guess they’re staying pretty stable at 500 million, maybe potential to narrow the losses, or what needs to happen to improve profitability.

Chi Tung Liu

We do have several entities in our new business group. The silicon base solar business is definitely turning around in Q1. And that’s the main reason behind this larger revenue, and smaller loss. The others including [indiscernible] shows some minor improvement, that’s still in the loss territory. And so our Sintim [ph] base solar, the status hasn’t changed much.

Randy Abrams

Okay, is it expectation, I guess towards second half, I mean we should expect continued growth and narrowing losses? Is that the direction or is that kind of a view on where this could go within a few quarters?

Chi Tung Liu

Well that’s certainly the whole – spending last few quarters, efficiency improvement for our new business operation. And however, the solar business which [indiscernible] off our new business is largely dependent upon the market price. So, for the time being, it’s difficult for us to predict the outlook for the solar business but we were definitely sure the operating efficiency will continue to improve.

Unidentified Analyst

Okay. Thanks a lot.

Operator

The next question is from Dan Heyler, Merrill Lynch. Go ahead please.

Dan Heyler

Thanks. Good morning, gentlemen. Good afternoon, gentlemen. I wanted to ask a couple of questions on the – looking at the growth rate of the industry overall. The projections are generally for [indiscernible] to grow at about 10% in 2014 and I’m wondering if you think you can achieve that level of growth or do better than that.

Po

Yes. I think overall that we’ve improved the outlook. We are optimistic that the semiconductor industry will continue to grow in 2014. They are mainly, will be driven by continuous [indiscernible]. While those devices as well as the connector devices including the [indiscernible] of things. We are anticipating the foundry settlement. We will also grow in 2014 and UMC will benefit from the hours broad base [indiscernible] that includes wires and wireless communications, consumer and computer markets.

Chi Tung Liu

Dan, you know we cannot commit for the revenue growth.

Dan Heyler

What do you think industry growth rate will be? What’s your projection?

Po

From our intelligence for foundry will be around 10% to 12%.

Dan Heyler

Okay. Thank you. And from, I guess, the standpoint of kind of a revenue contribution from 20, could you update us on when that should be by percent of revenue when you could foresee the 20 [indiscernible] contributes 5% of your revenue?

Chi Tung Liu

[Indiscernible] continue including small volume production for customers and pilot production for a couple of new technology. And currently, 20 [indiscernible] this year has risen above 80%. So hopefully, we can start to disclose revenues breakdown in several months.

Dan Heyler

So maybe we’d see maybe a few percentage points by the second quarter maybe. Is that right?

Chi Tung Liu

We’ll just talk before the numbers breakdown, hopefully, in a few months. So again, [indiscernible] at the current level.

Dan Heyler

Okay, great. And then I wanted to ask on the ASP side. Well, kind of looking at, I mean you’re reporting an immediate growth. It was pretty good this year, but the ASP doesn’t seem to be really registering much. So I’m wondering why your ASP isn’t improving. Foundry ASP has been going up quite a bit and competition is fairly limited. So I’m wondering why you’re not seeing a better lift to your ASP.

Po

Dan, I think you are right. Our mix in terms of 49 meter contribution it’s almost doubled as we mentioned year over year comparison base. However, our [indiscernible] facility didn’t really meet our internal target. And for most of the time – because I’ve been circling 12-inch metal capacity traditionally is below company average. And that’s the case for Q1 for [indiscernible] 14 as well. So the mix has improved. However, the 12-inch wafer loading actually still suffer from the 20 meter low with the additional rate.

Dan Heyler

Yes. I think that explains the margin side. But I’m wondering from a pricing side, have you needed to be the best on pricing or somebody else? I’m just wondering is there a certain competitive dynamics out that basically [indiscernible] has been focused a lot on this specialty growth as you have given certainly is in specialty technology as well. And then, clearly, the high-end – there’s really been only one supplier for 28. So I’m wondering kind of what the competitive dynamics in 14 have been. Has pricing been there kind of in minor expectation? Or has 40 been a little bit more aggressive than you would have thought, say, six months ago.

Chi Tung Liu

For Q1 maybe to a certain degree, we’re probably a little bit more aggressive. But for most of 2013, we’re really seeing much of pricing pressure. And as I mentioned already, the main reason was really our lower – or average [indiscernible] facility.

Dan Heyler

Okay. Could you give us the finding your – the color on your R&D budget for this year because I know there’s a lot of stuff going on in R&D. And if you didn’t have some quarterly trends for R&D, are they going to be fairly linear or will 28 nanometer be ratcheting up more towards the second half of the year. So how much R&D’s budget for the year and how shall we think about the quarterly trend?

Po

Our R&D expense will remain [indiscernible] to the fourth quarter last year and will be similar to the upcoming quarters.

Dan Heyler

Okay. That’s it for me. Thank you gentlemen.

Chi Tung Liu

Thank you.

Operator

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

Donald Lu

Hey, good evening. Can you give us some color on why the 28 nanometer ramp up is behind schedule that demand or yield? And also, I think theoretically, this High-K/Metal Gate is a great opportunity for UMC and can you give us some color like how was the activities there going on? And also, like when would you think you can start volume production for High-K/ Metal Gate. And I have a follow-up question. Thank you.

Po

I think there are many reasons for 28 nanometer ramp up is flawed and our anticipation is because the demonstration as we known it since the second half last year, the high-end smartphone demand were into inventory assessment. So even though our engineering prowess of the [indiscernible] enhancement is basically on track. However, the demand situation has become worst since, I think, the last two years. Yeah. Does that answer your question?

Donald Lu

Yes. And for the High-K/Metal Gate one will just to pick out for your customers and when do you think volume production can start?

Po

Yeah. We have the product paid off on High-K/Metal Gate. And yeah, we expect – we are centering that our products. However, for the [indiscernible] I would say it will significant.

Donald Lu

I see. I see. And also, just to follow up on Dan’s question on R&D. So I think, Q1, the R&D expense will be flat over Q4, but for the whole year, should we see continued run rate to increase the R&D because I could [indiscernible] or do you think it will be pretty flat every quarter.

Chi Tung Liu

I would say we’re pretty flat over the quarter through the year.

Donald Lu

Yeah. Okay, great. Thank you.

Operator

The next question is from Andrew Lu, Barclay Capitals. Go ahead please.

Andrew Lu

Thank you. A couple of questions from me. Regarding the Q1 guidance, you highlight we’ll be meeting UMC growth margin. But fund revenue [indiscernible] even ASP reduced by 4% mainly driven by mix. We are having some high revenue coming from out of the solar business. But the solar business is low so they actually refused. So a one deal, a lot [indiscernible] with that Q1 margin three percentage points lower. Can we say OP margin Q1 will be a slide losses.

Po

The lower the entry said equals the growth margin in Q1 ‘14 is because they addressed just now the [indiscernible] SPC3. And secondly, the OCM [indiscernible] caused by lower loading is [indiscernible], the high-end technology. And thirdly, the higher depreciation in the first quarter this year drove the [indiscernible].

Chi Tung Liu

To clarify, our guidance for volume margin of increase is down 4%. It does not include new business. So our new business is good from this volume and twice guided. And we keep them separate with our new business.

Andrew Lu

Yes. Early [indiscernible] because a new business, the guidance on the low says accurately reduced compared to the previous quarter. And the mix changes should have a much effect unless you have a low margin tool. The mix sense to raw margin product otherwise the mix change should have thick margin. So I think the answer probably I got is more likely that depreciation closing increase. Is correct?

Chi Tung Liu

That’s one part of the of reason, yes.

Andrew Lu

Yes. Any of the reason in Q1, the margin lower is some kind of one off while a two-quarter style close because [indiscernible] nanometer run [indiscernible]?

Po

We expect improvement at [indiscernible] loading. Profitably we will return to previous levels.

Andrew Lu

Okay. Thank you.

Po

Thank you.

Operator

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

Steven Pelayo

Great. Thank you. So to clarify some of the questions here. You guys report consolidated gross margin but you’re guiding the foundry only of two mid teen gross margin. So I’m curious on an apples to apples basis, what was the foundry only gross margin in the fourth quarter?

Chi Tung Liu

The full report, you still cannot see the preparation on the breakdown. Roughly, it’s – so I think for the effort, we already highlighted in the attached financial statement. For quarter four, our operating quarter for foundry is ND 775 million and the law –

Steven Pelayo

Microeconomic gross margin.

Po

I’m reporting the net numbers. So it’s a similar magnitude. You can do a rough calculation.

Steven Pelayo

All right. I’ll go back into it. When you look at your first quarter, I am looking at the [indiscernible] but that is the net profit for the foundry business. I’m curious what the gross margin is because you are guiding the first quarter gross margin foundry of mid-teen. So what is the comparable in the fourth quarter?

Chi Tung Liu

We’re only allowed to disclose the eco base numbers.

Steven Pelayo

Okay. And then as you look into the first quarter, you just reported a fourth quarter foundry only operating margin about 227%. With the following ASPs and I assume with your utilization rates in the third quarter, lower margins because you can maintain break even in the foundry only business in the first quarter.

Po

There is our target.

Chi Tung Liu

It is the target but we didn’t say that, so it’s very close and we can only see the gross margin, the meeting range with somewhat similar operating sense as Q4.

Steven Pelayo

Okay. And then to try to understand the margin fall out because of the mix, I’m curious if you could just talk about utilization rate for 200 millimeter versus 300 millimeter. You’re guiding utilization rates from the first quarter in the high 70 similar to the 79% you just reported. So with ASPs going down, that seems to me that 300 millimeter utilization rates are falling quite a bit faster. What’s the absolute level of 300 millimeter versus 200 millimeter in Q1 versus Q4?

Po

The range to [indiscernible] in Q4 last year is around 25%. And the first quarter this year is in high 16% range.

Steven Pelayo

Okay. Last question from me is on the 28 nanometer. You don’t have a target for percentage of revenue just yet. But you are talking about a CapEx number and expanding more to cash there. So could you just remind me how much wafer cash do you have in 28 nanometer today and where you think that might be at mid-year?

Po

Yeah. Our 28 nanometer capacity is 10,000 wafers a month.

Steven Pelayo

And where do you think that will be mid-year or year end?

Po

That will be for mid-year [indiscernible].

Steven Pelayo

So you think it’s unchanged in the first half of the year and then maybe you make additions in the second half, do I understand that correctly?

Po

The second half is where the competition change. We’re out of the more in High-K/Metal Gate capacity 10 K. The total capacity, I understand but the High-K/Metal Gate will increase.

Steven Pelayo

Okay. So you keep 10 K for the year but you shift to more High-K. Excellent. Okay. I think that’s all my question. Thank you.

Operator

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

Szeho Ng

Hi. Good evening. Can you give us an update on the presentation of revenue coming from the specialty clauses [indiscernible] last year?

Po

Yeah. Our specialty technology revenue contribution in Q4 is around 30%. The Q1 this year is also around the same [indiscernible]. Actually, a little bit higher than Q4 last year.

Szeho Ng

I see. All right. And any context for ascertaining 2014?

Po

We don’t have that yet.

Szeho Ng

Okay. My second question on cash dividend. I’m not sure if you can – of course, you cannot give any quantitative number but I’ll ask, should we expect the cash dividend to be up this year comparative last year? – or on the last question, just thinking about the dividend policy, do you think – should we be thinking of it more as a 60% payout rate on the NT1.01 EPS for per year or should we be thinking about it as a 60% payout rate on kind of the cash EPS of around NT0.45? So is it more like the NT0.60 dividend or more like a NT0.27 dividend? You’re not giving the exact number, but which is the right way to think about it?

Chi Tung Liu

Again, this will subject to the board approval but as the Chief Financial Officer, I think I will put [ph] something in between.

Szeho Ng

Okay. That would be great. And then just – and then on the PQs [ph] on 28 nanometer, on the call three months ago, you seemed pretty confident that it was going to be a low single digit percentage of revenue in Q4 of 2013. I mean, and now you’re kind of talking about it like it was closer to zero revenue in Q4 and maybe it stays closer to zero in Q1. Am I understanding that correctly? And can you help me think a little bit more about what changed?

Chi Tung Liu

Mostly, as we mentioned earlier, is on the demand side, I said we do have [indiscernible] in production and it reached certain target at the end of 2013. However, the overall demand is not really [indiscernible] according to our forecast, mainly due to the weakness in Taiwan’s market force [ph]. But the number of customer wise and number of people wise, especially on the engineering achievement actually all hit our targets. Our peak year, our 28 nanometer production actually now is over 80% and we are quite actually happy with that. Unfortunately, there’s some short term corrections in Taiwan’s [indiscernible].

Szeho Ng

Okay. Okay, great. I know – I mean, you’re thinking about this year, I mean you’re talking about less CapEx than had been kind of your prior expectation and you’re talking about not expanding 28 nanometer capacity. Is this – are we at the point where kind of the other people are already talking about 20 nanometer. Are you not giving up on 28 but kind of not expecting it to be a major node for you anymore?

Po

Yes, we believe that 28 nanometer is a long life node. And therefore, there’ll be many business opportunities arising from multiple waves of customers. So our 28 nanometer solution provides and optimize the balance in performance, fixed price advantage. To pass [ph] our IT offerings, we will enable UMC to catch more design waves [ph] in the coming quarters.

Szeho Ng

Okay, great. Thank you.

Po

Thank you.

Chi Tung Liu

Thank you.

Operator

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

Roland Shu

Hi, good evening. I think the first question to me is that for the 28 nanometer capacity. And I understand you said throughout end of this year, the capacity will be about 10,000 wafer per month. The question is, will you think these are too small and actually with this tiny capacity, will it be economic to wrong [ph] the 28 nanometer operation? And what kind of the label of capacity you think will reach the economy scale for 28 nanometer? And when will you reach this capacity? This is my first question.

Po

Yes. Our internal simulation suggests that the higher loading at 28 nanometer capacity will bring adequate return in the long run. So we are – it quite depends on the AFP erosion rate. So we believe the – to my first audit [ph], the 28 nanometer, the adequate capacity will be more than 25k per month.

Roland Shu

Okay. And when do you think you will reach this 25k per month capacity for 28 nanometer?

Chi Tung Liu

Roland, we do have a share almost ready like P5, P6 share ready standing by. And we are also upgrading certain – our 40 nanometer capacity which is capable or compatible to do a 28 upgrade if we need to do that. So again, it’s driven by the customer demand but we do have our goal to ultimately reach at least 25k per month including both High-K Metal Gate capacity and the Poly-SiON capacity.

Roland Shu

Okay, thanks. And second question is for your 65 nanometer and the 40 nanometer revenue. I don’t know – we’ve continued decreasing 65 nanometer revenue and continue increasing our 40 nanometer revenue. And are we going to see the revenue cross over – some of the [ph] contribution cross over in this year?

Po

Yes. We see the – our 40 nanometer revenue contribution will be quite consistent. It will be around 20% to 25% throughout this year.

Roland Shu

Okay, 20% to 25%. So how about the 65 nanometer revenue, will it continue decrease?

Po

Our – will be – 65 will be on probably consistent. It will be roughly around 30%, yes.

Roland Shu

Yes, that means – okay, 30%. So that means in this year probably for the product mix part of your – I think that we probably will see very demented improvement on the product mix. Am I reading this right?

Chi Tung Liu

No, actually, so largely that depends upon the ramp up [ph] speed for 28.

Roland Shu

Twenty-eight.

Chi Tung Liu

So 28, this number is our key focus this year and we’re going to jumpstart anywhere we can.

Roland Shu

Yes. But then you said probably the revenue contribution in first half will be limited. And so you expect jumpstart in second half. So what’s the expectation for by end of this year, the 28 nanometer contribution will be?

Chi Tung Liu

No, we don’t have the figures. But again, we do have most of the criteria ready and hopefully with – by demand, we will see a small [indiscernible] –

Roland Shu

Okay.

Chi Tung Liu

– throughout the next few months.

Roland Shu

Understood. Okay. And last question is for your specialty IC [ph] is about 30% of the total revenue. How about the contribution funds 12-inch on this total specialty IC there [ph]?

Po

We don’t have the data on hand.

Roland Shu

Okay, yes. Okay, thank you very much.

Po

Thank you.

Operator

The next question is from Eric Chen, Daiwa. Please ask your question.

Eric Chen

Good evening, and now I have [ph] three questions. And my first question regarding to the product competitive, the expansion and how many percent year-on-year growth and based on the 8-inch equivalent, so just give us the idea, the how many percent year-on-year growth. Thank you.

Po

Yes, our capacity increase year-on-year is 3.7%.

Eric Chen

Okay. Okay, the same question regarding to the driver IC and the particular idea in terms of revenue contribution from the driver IC, the business. And I also noticed that your geometry of the driver IC have improved, so could you give us the idea, the what kind the monitoring the geometry you are going to use for the driver IC business?

Po

From the revenue contribution side, our driver IC segment is around 40% of specialty segments. So specialty is 30% of total revenue and you can calculate the high voltage driver IC revenue contribution. And from the mainstream technology, it’s – we’re moving to 55 now in terms – the UMC’s strength in leading solutions.

Eric Chen

Okay, 55 nanometer?

Po

Fifty-five. Yes.

Eric Chen

Okay. So in that case, more [indiscernible] 55 nanometer process, that business, meaning from the driver IC business. Is that correct?

Po

It’s not at this moment. Yes, it’s not. Yes.

Eric Chen

I mean, for the 45 nanometer process, it would have in the revenue and in Q4 it’s not going to have it below the 10% of the – I’m sorry, 55. Okay. That question, I’m sorry. Let me clarify. For the 55 nanometer process, the driver IC is a major revenue contribution product, right?

Po

Yes. It’s not the case, yes.

Eric Chen

Not the case.

Po

Yes. It’s still – for the driver ICs, still menu from legacy nodes. Legacy and then ICs [ph].

Eric Chen

Okay. For more – and also the [indiscernible] now is going through by using the 55 nanometer process, right?

Po

Yes, that’s correct.

Eric Chen

Okay. Okay, thank you.

Po

Thank you.

Operator

The next question is from Michael Chou, Deutsche Bank. Go ahead, please.

Michael Chou

Hi, good evening. I have a couple of questions. The first one is, could we expect advanced node shells will decline quarter-on-quarter in Q1 given 12-inch loading will be below the common average loading? Can we say the 40 nanometer will decline quarter-on-quarter in Q1? Thank you.

Chi Tung Liu

It will be rather stable but the whole base is also declining. So it’s – at the moment, it’s hard to tell will it stay the same or decline. But it will be relatively stay around the 20% range. It depends on how the other mix change.

Michael Chou

Okay, thank you. Second question is, could you give some color on outlook implications in Q1?

Po

Yes, for Q1, my implication will be the – for consumer segment will be up to 32% and the subsector is CPB [ph] and [indiscernible]. And communication will be dropped to 47%. And the down [ph] sector– subsector is 1,500 product [ph]. The computer six months will be up to 17%. And the driver IC, audio codec is failed [ph]. So the subsectors are going up a little bit.

Michael Chou

Okay. My next question is, what was the current fee in Q4 last year and what’s your assumption for Q1 this year? Thank you.

Chi Tung Liu

We don’t have a forecast. We just follow the theme [ph] by numbers. So currently, it depreciated 3 percentage points but we take by average in the [indiscernible].

Michael Chou

Okay. What about the currency in Q4 when you translate it –

Po

39.65.

Michael Chou

Okay, thank you. Okay, that’s all my questions, thank you.

Po

Thank you.

Chi Tung Liu

Thank you.

Operator

The last question is from Steven Pelayo, HSBC. Go ahead, please.

Steven Pelayo

Yes, just a clarification on 40 nanometer. It grew I think 9% quarter-on-quarter and revenues were down 8% in the fourth quarter. You were just talking about 40 nanometer as a percentage of revenue. But I’m curious just on a dollar basis in the fourth quarter, can it grow on a dollar basis quarter-on-quarter?

Po

For Q1?

Steven Pelayo

Correct.

Po

It will be unlikely but it will be roughly 20% range. But given the sum [ph] revenue quarter, it’s probably unlikely to see growth in 40 nanometer.

Steven Pelayo

Okay. And then two more quick questions here. I’m curious, can you help us understand what’s the gross margin in the first quarter on the new business, because you guys always got kind of the operating level of that. I’m trying to understand how much is it OpEx and how much is –

Po

And it’s mix of combination, so it varies a lot. But the bottom line, it’s improving. I guess that’s the only thing I can say.

Steven Pelayo

Okay. Last question is, you have 10,000 wafer starts a month of the 28 nanometer capacity and if you want have a few percentage of revenues before you divulge into it, I think that only comes out to maybe one or two takes per month in run rate over a quarter. So should I assume today that you’re running kind of less than 1,000 wafers per month at 28 nanometer?

Po

Again, we have multiple products involved in production, although on a smaller scale. But it varies on month on month basis. And we haven’t really seen – next month, we are hoping for, yes. But it’s actually coming in a few months. So it’s just really radical if you stop [ph] the line and it’s not really a meaningful figure to quote, yes.

Steven Pelayo

Okay, fair enough. Thank you.

Po

Thank you.

Operator

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

Bowen Huang

Thank you, everyone, for joining us today. We really appreciate your questions from the call. Thank you for turning into our fourth quarter conference call as always. If you have any additional follow-up questions, please feel free to contact UMC IR at ir@umc.com. Thanks again and have a good day.

Operator

Ladies and gentlemen, that concludes our conference for fourth 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 Event section. You may now disconnect. Good-bye.