UMC 联华电子

Operator

Welcome, everyone to UMC’s 2014 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there would be a question-and-answer session. [Operator Instructions]. For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website, www.umc.com under the Investor Relations, 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 fourth quarter of 2014. I’m joined 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 focus and first 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 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 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 2014 business results.

Chi Tung Liu

Thank you, Bowen. I would now like to go through the 4Q ‘14 investor conference presentation material, which can be downloaded from our website. Starting on page 3, the fourth quarter of 2014 consolidated revenue was NT$37.24 billion with gross margin at 27.4% and operating margin at 12.2%. The net income attributable to the stockholders of parent was NT$4.56 billion and earnings per ordinary shares were NT$0.36. And on page 3, you can see the - our operating revenue deliver good solid growth compared to both last quarter and same quarter of last year. And you can envision rate in the fourth quarter of 2014 was around 93%. And our total wafer shipment is about NT$1.431 million 8-inch equivalent wafers. On page 4, is our comprehensive income statement. And revenue grew 5.7% and bank offer one-time license fee income from Fujitsu. As a result, our gross margin also reached 27.4% to about NT$10.18 billion. And net income in Q4 was NT$4.46 billion translating to about NT$0.36 EPS. For the full year results, our revenue reached NT$140 billion represent a 13.1% year-over-year growth. Gross profit was NT$31.8 billion and operating income was around NT$10 billion and EPS for the full year at NT$0.97 per share. Our balance sheet is on page 6 our cash position still around NT$45 billion. Total asset is still more than $10 billion. Our stockholder equity is around NT$225 billion. On page 7, there is a break down between our foundry business and new business for Q4 of 2014. For foundry business, the net income is around NT$4.6 billion and for the new business the loss was around NT$541 million. And the net result is about NT$4.46 billion as I mentioned earlier. In terms of foundry ASP in Q4 last year, it was flattish compared to the previous quarter. And for market breakdown, Asia represents 42% of our total revenue. And Euro is around 8%, and North America is 45%. And for the full year, the change is quite minimum, Asia is around 44% compared to 43% last year and Europe down to 6% from 8% in 2013. IDM represents roughly 10% of our total revenue and fiber is the remaining 90%. For the full year, it’s about the same picture, 91% in fibers. For segment breakdown, we have almost an identical breakdown for Q3 and Q4 with communication representing the largest slides, around 54%. And for the full year same message around 51% coming from communication and 29% coming from consumer segment. And again, we’re happy to see our 28 nanometer now has grown to 7% of our total revenue in Q4 last year, compared to 3% in third Q ‘14 and 40-nanometer also growth of 28% compared to 27% in the previous quarter. And for the full year, 28-nanometer represents about 3% of the full year revenue and 40-nanometer is 21% and 65-nanometer is another 28%. And for 4Q ‘14, our total quarterly wafer capacity was around 1.577 million 8-inch equivalent and 12i in Singapore, we have some technology upgrade from 65-nanometer to 40-nanometer so that caused our temporary drop in terms of variable capacity. And we will see the capacity number to be restored over the next quarter or two. And for Q1 2015, we expect the 12A our Tianan events facility continue to add new capacity. And yet, we also effective in some of the shorter walking days due to Chinese New Year holidays in Q1 of 2015. So the number is 1.58 million. And for CapEx our CEO will give a more detailed guideline later but there is maximum about 1.8 billion for 2015 compared to 1.4 billion in 2014. So, that’s the summary of UMC result for Q4 2014 as well as full year 2014. More details are available in the report which has been posted on our website. I will turn the call now to Mr. Yen, CEO of UMC. Po-Wen Yen Okay. Thank you, Chi Tung. Hello, everyone. I’d like to update everyone UMC’s fourth quarter operating results. In the fourth quarter, foundry revenue grew 3.7% sequentially to NT$34.74 billion. This figure includes a one-time 40-nanometer licensing fee from Fujitsu, lifting gross and operating margins to 30.2% and 14.6% respectively. The overall capacity utilization rate remains at 93%, bringing shipments 1.43 million 8-inch equivalent wafers. Our 28-nanometer technologies represented 7% of our foundry revenue in fourth quarter 2014. The shipments from our 28-nanometer did lost High K Metal Gate process exceeding that of 28-nanometer Poly/SiON wafers. Excluding the Fujitsu, 40-nanometer licensing fee, UMC’s 2014 foundry operating profit grew 74% from the previous year. This slice in profitability was mainly driven by double-digit percentage growth in wafer shipments and partly due to the rapid potassium ramp of 28-nanometer, which accounted for 3% of total 2014 revenue. All collaborative technology efforts with our partners, we have enabled UMC to deliver additional manufacturing solutions to fulfill new product specs strengthening our position in the IC supply chain to take advantage of the continued momentum in market demand. The Taiwan government authorities recently approved UMC’s application to invest in a 12-inch joint venture fab in Xiamen China. This investment will create opportunities for UMC to benefit from China’s enormous chip requirements by bringing us closer to the Chinese semi-conductor supply chain. The cooperation highlights UMC’s differentiated approach of global expansion proven through Singapore’s fab 12i and Suzhou, China Fab 8A successfully achieving economy of scale via mitigating customers risks via geographic diversification via we expand our potassium sites worldwide. We are also focusing on continuous organic growth by deploying additional capacity at our Tianan sites. As such, we will budget 2015 CapEx approximately $1.8 billion. Our 2015 CapEx illustrates our strong commitment to meet customer’s requirements and gain additional market share through efficient execution and strategic alliances. UMC’s global expansion efforts driven by manufacturing excellence, we are strengthening customer services with increased operating scale to enhance corporate financial earnings and deliver long-term returns to our shareholders. Now, allow me some time to summarize the recent highlights in Chinese. [Foreign Language] I have finished my remarks. And now, let me go over the first quarter 2015 guidance. The foundry segment wafer shipments to show an increase of 2% to 3%. The foundry segment ASP in U.S. dollars will increase by approximately 3%. The UMC foundry segment gross profit margin will be in mid-20 percentage range. The capacity utilization rate for foundry segment will be approximately 90%. 2015 CapEx for foundry segment will be $1.8 billion. The guidance for new business segments revenue will be approximately NT$2 billion and the net loss attributable to UMC parent company to be approximately NT$170 million. That concludes my comments. We are now ready for questions. Operator, please open the lines up. Thanks.

Operator

[Operator Instructions]. And the first question comes from Randy Abrams, Credit Suisse. Please ask your question.

Randy Abrams

Okay, thank you. Good result and outlook, the first question on the first quarter guidance if you could go into what’s driving the strength for shipments to grow 2% to 3% normally in a low season? And also particularly accounting for TSMC, also getting pretty well for first quarter?

Po

Yes, our first quarter 2015 buy application communication segment will be the strongest one and the computer will follow this trend. And consumer will be kind of slow. And in the communication segment, the Wi-Fi, Facetime and ISP are small driver interface, distance driver interface is going up and the microcontroller unit is going down.

Randy Abrams

Okay. And affect follow-up on your 28-nanometers now seeing a stronger ramp-up. And we’re seeing the other foundries like TSMC adding capacity. How are you viewing the landscape for 28, just from pricing and margins? And do you still see to reach the 12-inch average in the second half, just how profitability and pricing looks for 28 as you ramp up?

Po

Yes, our - yes our 28-nanometer profitability has improved due to a higher product yield with an enhanced scale. And on the other side we foresee the 12-inch overall loading, we also improved. So, the 12-inch corporate outreach profitability will rise, which are putting slightly ahead of our 28-nanometer’s contribution. So therefore our 28-nanometer will still have a small margin dilutive effect in 2015.

Randy Abrams

Okay. And where 12-inch utilization rising, could you give color on 40-nanometer and 65-nanometer like the more mature notes, what you’re seeing, if you’re still seeing growth from 40-nanometer and 65-nanometer as you also ramp up 28-nanometer?

Po

Yes, well, it’s taking our 12-inch mature loan between 65-nanometer and 90-nanometer loading will be improved in the second half 2015. So that will, they have to improve our overall revenue.

Randy Abrams

Okay. And the last question, I wanted to ask on the CapEx, the $1.8 billion. Could you go through how much 28-nanometer capacity you now plan and then also, an update on the 8-inch expansion? Thank you.

Po

Yes, our 28-nanometer capacity expansion plan is by the second quarter ‘15, will reach 20,500 per month. And we have additional capacity expansion plan at phase five our Tianan fab in the end of 2015 or around early of 2016.

Randy Abrams

Okay. And for 8-inch?

Po

That will be additional 9,000 wafers per month.

Randy Abrams

Okay. So 9,000 so would go to 29.5 if you do the second phase?

Po

Yes.

Randy Abrams

Okay. And then your plan for 8-inch capacity?

Chi Tung Liu

Yes, our current expansion for 8-inch is only available at our Chinese site in Suzhou Hejian. And they are expanding from previously recorded around 45,000 wafers per month and gradually to over 50,000. I think they ultimately will go up to 61,000 per month. And that will happen earlier this year.

Randy Abrams

Okay, thanks a lot. Good result.

Po

Thank you.

Operator

And the next question comes from Bill Lu, Morgan Stanley. Go ahead please.

Bill Lu

Yes, hi. Good result and good ramp on 20-nanometer reservations. Just a couple of more questions on 28, I wasn’t quite clear on Randy’s question. If you look at the $1.8 billion in CapEx this year, does that get you to the 20,500 per month or does that include the additional 9,000 by the end of the year?

Chi Tung Liu

Bill, this is cash based paybacks. And you also need to factor in the $1.4 billion we spent in 2014. So, we already have about 12,000 to 15,000 in production almost by now. So the additional 8,000 to reach 20,500, most of the spending is done in 2014. And the $1.8 billion also, big portion will go for this 9,000 expansion at the end of 2015 and early 2016.

Bill Lu

Got it, okay. That’s very clear. So, you’re doubling your capacity at 28, should I read it as you’re now feeling more confident that you have more customers coming in at 28 or the existing customers ramping, can you help me with that?

Po

Yes, after we entered in the 28-nanometer production in February 2014 for both, we actually demonstrated a pretty good yield ending rate on both Poly/SiON and High K Metal Gate technologies. So based on our customer engagement, we are gaining more traction on 28-nanometer business. So, we are pretty confident on our 28-nanometer business going forward.

Bill Lu

So, can you help me with how many customers you have now, how many you would need to get to at the end of the year to have the capacity full?

Po

We are, on 28-nanometer we have over 20 customers engaged and more than 60 28-nanometer cap-offs.

Bill Lu

Okay. What would be, what is going to be the percentage of revenues from 28-nanometer in the first quarter?

Po

It will be a high single-digit first quarter ‘15.

Bill Lu

Okay, great. So, just two other quick ones. One is, is there going to be impacted dividend given the higher CapEx, and two is, how do we model depreciation? Thank you.

Chi Tung Liu

The amount of depreciation will grow around 15% to 20% year-over-year. So, higher gross rate compared to the last few years. And we certainly, we will impact our dividend payout, that won’t be discussed until the board meeting later of this quarter.

Bill Lu

Great, thank you very much. That’s it from me.

Operator

And the next question comes from Gokul Hariharan, JPMorgan. Go ahead please.

Gokul Hariharan

Yes, hi. Great result and thanks for taking my question. First of all, could you give us some update in terms of your China plan, when should we expect from 40-nanometer capacity being built in Xiamen? And secondly, also beyond 28, when would you start ramping up some 40-nanometer capacity in Taiwan? And is that contingent for you to have 28-nanometer in China? That would be my first question. Thanks.

Chi Tung Liu

Well, the 40-nanometer and also 55-nanometer capacity plant for Xiamen project is really aiming to penetrate into the domestic market in China. And that’s not really tying into our 40-nanometer plant, our CEO will give you update on 40-nanometer development later. As for the Xiamen project, we received the official approval from the Taiwan government, and we also incurred a further $100 million yesterday from Hejian for these new projects. And the plan is really to see early production by the end of 2016 and expanding to maybe 20,000 wafers per month covering both 40-nanometer and 55-nanometer by the end of 2017, so, about three years to reach 20,000.

Gokul Hariharan

Okay.

Po

I’ll need to update our 14 finFET technology development is on track. And now we are expecting the process will be ready for curtains tape out in the second quarter this year.

Gokul Hariharan

Okay. So, when we talk about the Xiamen facility, is that compatible with the eventual conversion to 28, as you’re building the capacity. And is that something that once you have some 14-nanometer ramping up you could that moving to 28-nanometer in Xiamen pretty much concurrently or is that completely subject to government approval?

Chi Tung Liu

Of course it is completely subject to Taiwan government’s approval. However, as I mentioned earlier, this 20,000 40/55-nanometer capacity is really aiming at specific, domestic Chinese market for their specific products. And that’s really the goal to manage everything through the local supply chain if you will. So at this point, as I mentioned, it takes three years to reach 20,000-wafer capacity but it’s still long way to go.

Gokul Hariharan

Okay, got it. Thanks very much.

Chi Tung Liu

Thank you.

Operator

And your next question comes from Daniel Heyler, Bank of America Merrill Lynch. Please ask your question.

Daniel Heyler

Yes, thanks very much. Chi Tung, could you tell us what the gross profit margin was excluding the Fujitsu license fee that came in from Fujitsu in the fourth quarter please?

Chi Tung Liu

Q4 was 26.8%.

Daniel Heyler

Okay, great, okay. And then, is there any more of that coming through this year or is that done?

Chi Tung Liu

There was one-off but there are, of course our Xiamen plan for example, 40/55 will also be licensing technology from UMC. So, we will get also licensing fee income from our Xiamen project but we don’t know when that’s going to happen.

Daniel Heyler

Okay, that will happen I presume when the revenue starts coming in?

Chi Tung Liu

We don’t know yet, yes.

Daniel Heyler

You don’t know, okay. And then you had mentioned that you’ve got 20 customers Dr. Yen had mentioned, 20 customers on 28-nanometer, and I wanted to reconcile that with the kind of high single-digit percentage of sales, it seems like you’ve got a lot of small customers or maybe explain how many customers are actually in production, because it seems like a small contribution of revenue for how many customers you have.

Po

It’s a very diversified, in terms of the scale it’s very diversified products we have induced. And you normally would take a list in several quarters after the product tape out, to enter.

Daniel Heyler

Okay, that makes sense. Okay, you’ve had I think maybe one important partner, how many kind of partners are you in production with now at this point in volume?

Po

It’s more than five.

Daniel Heyler

Okay, excellent. And I wanted to maybe get a little bit more color on the 65-nanometer and 40-nanometer challenges there, as you talked about last quarter. I was wondering if you could elaborate on some of the dynamics there, why isn’t utilization at that note higher, and what’s it going to take to get those fabs still up?

Po

Yes, we have engaged on some of new appreciation notes for 40 and 55, in very high volumes for the OCD driver. And the 90-nanometer embedded flash with some customers and that is the main area we expect to grow our mature notes, term to mature notes interaction rate.

Daniel Heyler

Okay. Could you give a sense of timing that you said, I think you said earlier that you didn’t think you could maybe achieve high utilization there until second half of this year. I’m wondering why it’s taking that long because I guess it seems as though that your competitor stabs are pretty full on the mature notes. So, to picture in those notes, do you mean, they may be more aggressive in pricing or you need broader technology. I’m just wondering why you’re not taking more shares there, because typically those notes are more price-sensitive and you would be able to take share back if you’re aggressive on pricing. So I’m wondering why you’re not able to attack those markets with more aggressive pricing or something to get the utilization up on the 40-nanometer and 65-nanometer.

Po

It’s actually it’s not a pricing issue. It’s affected by the last year, the second half of last year because some application did not take off as we expected. And this year we will be more confidence on gradually improve the loading of the 65-90 starting in the Q2 going down to the end of this year.

Daniel Heyler

Okay. Are you anticipating, which of you of the small panel display driver market which is moving increasingly to those notes because there is I guess power, and power chip is coming in with their 12-inch fab on those products. And I guess, UMC has quite a bit there in those notes. Could you explain for us what you’re anticipating in the mobile and the display IC market for this year?

Po

Yes, we are anticipating that especially the small panel display drivers the demand is very strong. And also some applications that are migrating to the higher end technologies. So we’re pretty optimistic on that.

Daniel Heyler

Okay, great. And then, Chi Tung, could you give us, I know you’ve given us some of the details on the individual fab basis, so because I know you’ve got different issues on fabs you’re bringing up some capacity and bringing it back on. So what’s the full year capacity growth, do you have that number in front of you?

Chi Tung Liu

Yes. The full year, overall capacity growth is around 5% year-over-year.

Daniel Heyler

Excellent, okay. Thank you gentlemen. Congratulations on the results.

Po

Thank you.

Operator

And the next one is from Steven Pelayo, HSBC. Go ahead please.

Steven Pelayo

Yes. If I could just quickly follow-up on Dan before my question, the capacity growth of 5% year-on-year. I’m curious how did that breakout what is 300 millimeter versus 200 millimeter capacity growth?

Chi Tung Liu

The 300 millimeter growth will be accounted for 7% growth and the 8-inch accounted for 3% growth.

Steven Pelayo

3% year-on-year?

Po

Year-over-year.

Steven Pelayo

Okay. You just talked, first of all, I guess, I just want to make sure my accounting perspective, the Fujitsu license was $50 million, we exclude that from the top-line and the gross profit line that comes out to a foundry growth margin of 27% excluding licenses. Do I understand that correctly?

Chi Tung Liu

If you’re using the consolidated numbers this is, you also have to take out the year-over-year business revenue.

Steven Pelayo

Yes, yes, taking that as well, okay. I just wanted to make sure I got that correct. Now, your guidance for next quarter is for mid-20s gross margin for the foundry only business. I guess, I’m trying to understand you just did 27% excluding the license. Are we guiding the gross margins down quarter-on-quarter despite higher ASPs, can you give a little bit more specific on your guidance for the first quarter foundry only gross margin?

Chi Tung Liu

The guidance is mid-20, so you’re right. At this point we can already say up or high, up or down mid-20. But to answer your question, yes, we do have higher depreciation expenses for the year 2015. And as I mentioned, we are looking for around 15% to 20% increase in depreciation for the whole year and for quarter one alone around 5% increase sequentially.

Steven Pelayo

5% quarter-on-quarter, okay. Can you comment a little bit, I think you’ve talked about having 12,000 to 15,000 in production of 20-nanometer, going to get it to 20,000 over 20,000 by mid-year. Is this pretty much to that 12,000 to 15,000 fully loaded today or what’s your utilization rate at 20-nanometer?

Chi Tung Liu

It’s around, we’re currently around 70%.

Steven Pelayo

Around 70%, okay, thank you very much.

Chi Tung Liu

Thank you.

Operator

And the next question comes from Donald Lu, Goldman Sachs. Go ahead please.

Donald Lu

Hi, yes. My first question just to follow-up Steve’s question. Did you say your 28-nanometer capacity utilization is 70% - 75%?

Chi Tung Liu

Yes.

Donald Lu

Okay, great, thank you. Yes, just following up on that if you do a quick math that based on your 28-nanometer revenue, your capacity is at 12,000 to 15,000 according to Chi Tung and 75% utilization rate then we get to ASP, it’s not very high?

Po

I mean, obviously we mentioned, currently still some dilutive for our overall earnings if you compare to 12-inch average. And this is largely due to the early vamp of the production.

Donald Lu

So that’s a function of yield, so you expect that to improve?

Chi Tung Liu

Yes, correct.

Donald Lu

I see. My next question is on the Q1 guidance, you - the wafer shipment is up 2% to 3%, capacities up little bit. But then you said utilization is going to decline, how come - it seems like wouldn’t get to, the neutralization cannot decline if you increase your wafer shipment in Q1?

Chi Tung Liu

Yes, if you go through the first page of our handout, you will find out that last quarter our shipment was actually declined sequentially with same utilization rate. So there were, some kind of pre-build of wafers, so wafers in the pipeline in Q4. They would be larger than normal volume in Q4, which will be shipped in Q1 this year.

Donald Lu

Okay, so that was little dilutive to your margin as well?

Chi Tung Liu

Not necessarily, but it would restore the capacity utilization rate figures for sure.

Donald Lu

Okay, got it. And also, what’s the guidance for OpEx this year?

Chi Tung Liu

OpEx this year we’ll see percentage of revenue to come down a little bit, but the absolute dollar amount may stay flat.

Donald Lu

Flat only? The total OpEx?

Chi Tung Liu

Yes, will be flattish for the full year because there is a beneficial factor that our IBM license fee has completed by the end of 2014.

Donald Lu

Okay, got it. And would that be pretty lenient throughout the year like for Q1, Q2, Q3, Q4?

Chi Tung Liu

It really depends on the R&D project. So it’s hard to say yet. But the full year number as I mentioned is going to be somewhat flattish compared to last year.

Donald Lu

Okay, got it. Thank you very much. Great result.

Chi Tung Liu

Thank you.

Operator

And our next question comes from Andrew Lu, Barclays Capital. Please ask your question.

Andrew Lu

Yes, Dr. Yen and Chi Tung, a couple of questions. Do you have this year revenue gross target something a range will be useful to?

Po

We cannot comment on that.

Andrew Lu

Okay.

Po

Yes, but we, sorry.

Andrew Lu

Any specific reason?

Po

We do have some sorry, yes, we do have some outlook.

Andrew Lu

Are we looking for double digit growth as TSMC guided in the zone of about 12%?

Po

The foundry outlook is, we are according to our information it’s around 10% to 15% range and grows. And for UMC, we are optimistic about the growth on 2015 but we don’t comment in fact these numbers.

Andrew Lu

Thank you. In terms of CapEx at $1.8 billion, I did not know anyone as which you answered already, what’s the breakdown of that CapEx? Is that all 100% 28 or there is some CapEx go into the 14 finFET as well?

Po

I can only comment on the most, majority part around 90% is on 12-inch capacity expansion.

Andrew Lu

90% on 12-inch capacity, thank you. Do you see the competition from SMIC on 20 Poly and High K Metal Gate because their acacia is quite aggressive as well? But in to see, likely to have 10,000 to 15,000, so it’s just one year behind you?

Po

Sorry, we don’t comment on our competitors. However, we are still pretty confident on our technology revenues and featuring efforts on both parties [indiscernible] versions, so based on our customer engagement that demand is still pretty strong on that.

Andrew Lu

Thank you. And the capacity you have on 28, you earlier mentioned steer dilution for this year gross margin from 28-nanometer. What kind of monthly output to get the corporate average margin?

Po

I don’t quite understand the monthly output?

Andrew Lu

Yes, because…

Chi Tung Liu

Dr. Yen told something on that.

Po

Okay. Actually there are some other factors that affect the, our 28-nanometer dilutive effect. It’s as I mentioned just earlier and that overall capacity utilization rate on 12-inch, that will have some contribution. And as we foresee our overall, which will note, 12-inch would still note utilization will be improved in the second half this year. So that will beat our 12-inch corporate average profitability. So that will still kind of keep a small margin dilutive effect for our 28-nanometer profitability.

Andrew Lu

Thank you.

Po

So it will affect also by the utilized rate of 12-inch on mature notes.

Andrew Lu

Yes. Do we have a revenue target for percentage 28 by the end of this year?

Po

Yes. By the end of this year, we are targeting around 15% to 20% of total revenue of 28-nanometer.

Andrew Lu

Okay. The last one I have is solar business I recall there is some user indicated yourself some that you sold that business to other firm. So is that already factored into the first quarter’s guidance?

Chi Tung Liu

It’s already factored into our new business guidance in Q1. But the actual merger date is July 1.

Andrew Lu

So, after July 1, can we assume that revenue in the low session will begin, because the ownership on this new solar business actually is a book holding right, it’s less than 20%?

Chi Tung Liu

Yes.

Andrew Lu

Okay. Thank you.

Chi Tung Liu

Thanks.

Po

Thank you.

Operator

And the next one is from Szeho Ng, BNP. Please ask your question.

Szeho Ng

Hi gentlemen. I just want to ask more questions on the new business. So, should we assume all the new business contribution top line and also the cost would be gone after second - after July this year? Is it what you mean?

Chi Tung Liu

Probably the top-sell, the silicon based solar business we had was merged to multi, and that will effective on July 1. It was on the company interest, starting to become effective this year already January 1, which is - we still book some of the top line and bottom line losses those excluding some fixed cost depreciation. So it’s a little bit complicated. We can walk you through offline.

Szeho Ng

Okay, all right. And but any rough indication about the revenue you’ll have once you take off the top-sell part? Yes.

Chi Tung Liu

Majority today is actually top-sell. So it’s going to be quite minimum after July 1.

Szeho Ng

But the operating loss would be probably seeing around 170?

Chi Tung Liu

Yes, it would be reduced.

Szeho Ng

Similar to the Q1 guidance you mentioned right?

Chi Tung Liu

Well, it depends on the market condition at that time. But at least there will be no loss contributed by top-sell.

Szeho Ng

Okay, all right. Okay, and second question, what’s the exchange rate you use there for Q4?

Chi Tung Liu

30.89.

Szeho Ng

30.89, okay, all right. Okay, thank you very much. Great results.

Chi Tung Liu

Thank you.

Operator

And the next one comes from Michael Gold, Thomson Reuters. Go ahead please.

Michael Gold

Hi, thank you for taking my question. I guess the first thing I’d like to ask about is the China plant one more time. I’m just curious if you might be able to talk about how much of your capital expenditure growth is, will be in that plant or just in China in general, if you could talk about that? Thanks.

Chi Tung Liu

Our CapEx of $1.8 billion did not come in clear timing of the China spending. Currently the China spending is treated as an independent project. It’s not in the group CapEx yet.

Michael Gold

Okay. Do you have any, can you mention any sort of capital expenditure plan for that this year?

Chi Tung Liu

Well, it takes about 18 months for the construction. You will only cost minimum amount of money for building the shelf. So this year, the number will be quite small.

Michael Gold

Quite small, okay. And then, do you have any just sort of overall goal for sort of competitive percent of your overall capacity to come from your China operations?

Chi Tung Liu

Well, the design capacity for the China or the Xiamen project is 50,000 wafers per month. But the multiple-share both plan is to reach 20,000 per month first by the end of 2017.

Michael Gold

Okay. And, okay, all right. Thank you.

Chi Tung Liu

Thanks.

Operator

And your next one is from Don Ye [ph], Nomura. Go ahead please.

Don Ye

My first question is that the foundry gross margin was 27% in 4Q may I ask how many percentage from the help of foreign exchange?

Chi Tung Liu

I think we are in the same position as the other companies. Basically we experience about 1.5% to 2% NT dollar depreciation in Q4 alone. And every one percentage point of NT dollar depreciation will contribute about 0.4% percentage to 0.5 percentage points enhancement in our growth margin. So probably you can do the math.

Don Ye

Thank you. And in terms of the gross margin in foundry business last Q4, can we say that the 28-nanometer has already reached a property of operating margin in that Q4?

Chi Tung Liu

Well, we only guided that currently it’s about 3% shy from our average 12-inch gross margin. And again, each quarter is very different as mentioned our 12-inch foreseeable clothing improving in the second half of this year. So, we don’t really comment on that. But again, it’s a small dilutive effect through our overall 12-inch operation.

Don Ye

So, you say that there is a 3% impact to gross margin?

Chi Tung Liu

No, there is a few percentage point dilutive effect compared to our overall 12-inch operation.

Don Ye

Okay. I see. So, in terms of the capacity, could you remind me that the 8-inch fab capacity will grow 7% year-over-year and 12-inch will grow 3% year-over-year?

Chi Tung Liu

The opposite, yes.

Don Ye

The opposite?

Po

12-inch should grow 7% and 8-inch grow 3% year-over-year.

Don Ye

I see. So what is the High K Metal Gate and Poly/SiON capacity allocation, if you want to reach 20,500 per month in first half and the 30,000-wafer per month at the end of this year?

Po

2Q ‘15 High K Metal Gate will take 12,500. Yes, 12,500 among the 20,500 per month capacity. So High K Metal Gate will be a major part.

Don Ye

Okay, 12,500 right?

Po

Yes. So the partly sale will be 8,000 in Q2.

Don Ye

I see. I see. So how about the end of the year?

Po

It will be kind of proportional this is kind of proportional down to the 30,000.

Don Ye

I see.

Po

The majority part will be still the High K Metal Gate version.

Don Ye

I see. In terms of the new business sold for Q1 guidance, top-sell still included in the consolidated financial statement right, so the profitability loss it’s also included top-sell?

Chi Tung Liu

Yes, as I mentioned, majority of the top line and bottom line is included all the way until July 1. However, due to some accounting treatment which is quite complicated, the fixed cost or the depreciation of the top-sell is excluded from the finalization starting from January 1. And again we can walk you through the details if you want offline.

Don Ye

Okay, okay, my last question is what is the FX guidance in Q1?

Chi Tung Liu

Yes, we don’t take FX forecast but we just follow the ongoing numbers.

Don Ye

Okay, I see. Thank you. Cheers.

Chi Tung Liu

Thank you.

Operator

And then next question comes from Roland Shu, Citigroup. Go ahead please.

Roland Shu

Thanks to take my questions. Actually almost all my questions have been asked and answered. I did have one more question is, for all new businesses, are we going to invest more in the new business such as Gary [indiscernible] or other items? Do you have any comment on that?

Chi Tung Liu

Well, first of all, we don’t have any vast expansion plan for solar related. However, we recently did some corporate restructure for our Gary [indiscernible] business. Not only we see the growth potential there but also they will play a big role in transitioning our fixed interest effect from similar space to eventually to that base for the longer term. And help us to fade out - phase out 6-inch wafer trend in the longer term. And they will be the key focus in terms of our new business for the near future.

Roland Shu

Yes. So, how much you are going to spend to turn this 6-inch to the Gary [indiscernible]?

Chi Tung Liu

Well, it’s already existing facility with minimum upgrade. So it’s not going to be much. And most of the CapEx will be supplied by the internal generating cash.

Roland Shu

Okay. So the investment of CapEx actually is not included into this $1.8 billion CapEx plan this year?

Chi Tung Liu

That $1.8 billion is only for UMC foundry.

Roland Shu

Okay. So, it does not include this? And then, what’s your plan for the dividend this year?

Chi Tung Liu

I mentioned it’s up to our board meeting sometime in March or April. However we will try to have very stable predicable dividend policy as we can.

Roland Shu

Okay, thanks. And last question is on your, given that $1.8 billion CapEx spending and also on your given the continues investment in the shipment. And also with this potentially dividend payout, so are we considering to raise amendment this year? And if we do, and by what kind of method? Thank you.

Chi Tung Liu

Well, each year we’ve been raising money from different instruments but then this year, we’ll continue to do so but mostly coming from debt market.

Roland Shu

Okay, thank you.

Chi Tung Liu

Thanks.

Operator

And now next question comes from Rick Shi, Daiwa Capital Market. Please ask your question.

Rick Shi

Yes, hi, good evening. And good results, congratulations. There is a couple of questions here, I think I probably missed a number here. Did you guys talk about your 28-nanometer capacity build by the end of this year? I know it’s about 20,500 mid this year, what about by the end of this year?

Chi Tung Liu

There will be additional 9,000 wafer capacity sometimes at the end of this year or early next year from our second phase, Phase V facility.

Rick Shi

Okay. So, I can fairly assume probably around 30,000 by the end of this year right?

Chi Tung Liu

Probably this year, yes.

Rick Shi

Okay, good. Second question is, I would like you guys to give me a bit more color about your gross margin trend throughout the whole year because it seems to me that you talked about 10% to 15% year-over-year increase in the overall foundry business, foundry market. And I’m not sure how much you guys will grow, you will receive at the end of this year but you also mentioned about your depreciation is going to grow by 15% to 20% year-on-year. That is much higher than last year. So, I’m wondering it looks to me that your depreciation cost this year is going to rise much faster than your total revenue growth. So how will that impact your overall margin China throughout whole year?

Chi Tung Liu

Well, that’s only a big challenge we face for 2015. But again, if we can now come on the top-line, we can certainly not come in the bottom line. We do see new business I mean, incremental revenue growth coming from our leading edge revenue, hopefully it will improve throughout the year improvement. And we also have plan for our mature 12-inch note, in addition to go higher in the second half which has been a drag for our overall profitability. So, altogether now positive and negative sectors for 2015 but we will try our best.

Rick Shi

Okay, got you. Thank you. Okay, that’s all the questions I had. Thank you so much.

Chi Tung Liu

Thank you.

Operator

Ladies and gentlemen, we’re running out of time, so we’re taking the last question. And the last question comes from Edward Ling [ph], CIMB. Please ask your question.

Edward Ling

Hi Chi Tung, thanks for taking my question. My question is on the new business. Can you tell us how - what’s the number attributed to the top-sell in 2014 in terms of the loss?

Chi Tung Liu

Well, for example for Q4, it was about NT$500 million also losses, and less than half come from top-sell. So, a little bit less than half comes from top-sell.

Edward Ling

So, for the new business as a whole, should we assume that last year, the lowest run top-sell is about 50%?

Chi Tung Liu

Well, I can only have the Q4 number but that maybe the part figures.

Edward Ling

Okay. So…

Chi Tung Liu

Q1, top-sell was profitable as in Q1 on Q2 last year, so I cannot remember exactly but Q4 that was the case, I mentioned.

Edward Ling

Thanks a lot. So, you mentioned that you’re not going to invest in the solar business anymore. But will you further divest other solar operation? When I look at the balance sheet I think there is deal, about three to four investments in solar related business. Will that be the direction you’re going to continue to divest in solar business?

Chi Tung Liu

I did not say we will not invest in solar business. I would say, we will not expand the solar capacity but we will continue to invest for the sake of inefficiency and profitability competitiveness enhancement. So we will continue to invest but not for capacity alone. And as for divestment plan, we don’t really have any concrete plan but again anything can benefit our competitiveness or efficiency of our solar plan, we will do it.

Edward Ling

Okay, thanks a lot for the clarification. That’s all the questions I had. Thanks a lot.

Chi Tung Liu

Thank you.

Operator

Thank you for all your questions. This 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. We appreciate your questions today. If you have any additional follow-up questions please feel free to contact UMC at ir@umc.com. Have a good day. Bye-bye.