UMC 联华电子

Operator

Welcome, everyone, to UMC’s 2015 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 the question. And 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 has finished. Please visit our website, www.umc.com, under the Investor Relations, Investors, 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 everyone to UMC’s third quarter 2015 earnings conference call. Joining me today are Mr. Po Wen Yen, the CEO of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present third quarter financial results, followed by the key message from our CEO, addressing UMC’s focus and fourth quarter guidance. After their remarks we will proceed to Q&A session. UMC’s quarterly financial reports are available at our website, www.umc.com, under the Investors, Financials section. During this conference, we may make forward-looking statements based on management’s current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company’s control. For these risks, please refer to UMC’s filing with the SEC in the U.S. and the ROC security authority. I would now like to introduce UMC’s CFO, Mr. Chitung Liu, to discuss UMC’s third quarter 2015 business results.

Chitung Liu

Thank you, Bowen. I would like to go through the third quarter 2015 investor conference presentation material which has been - can be downloaded from our website. Starting on Page 3 of the third quarter of 2015, consolidated revenue was NT$35.32 billion, with gross margin at 19.6% and an operating margin at 2.8%. The net income attributable to the stockholders of the parent was NT$1.71 billion. And the earnings per ordinary shares were NT$0.14. And capacity utilization rate has dropped by around 5 percentage points to 89% in the third quarter. Now, please turn to Page 4, with statement of income. And revenue of NT$35.3 billion in the third quarter was down 7% compared to second quarter of 2015. Gross profit reached 19.6% of total revenue of NT$6.9 billion. And net income is NT$1.3 billion or 3.7% of the total revenue. And EPS, as I mentioned earlier, is NT$0.14 per Taiwan ordinary share. On Page 5, here is the cumulative first three quarter financial statement. Revenue show 8% year-over-year for the period of January through September, reached NT$110.9 billion in revenue. Gross margin is 22.3%. Also, gross profit improved 14.4% year-over-year to NT$24.7 billion. And net income reached NT$9.76 billion, a growth of 39% year-over-year. As a result the EPS is NT$0.82 and EPS per ADS is NT$0.125. On Page 6, is our previous - balance sheet. Cash and cash equivalent is NT$52.1 billion. And total assets is NT$329 billion, with stockholder equity around NT$223 billion. On Page 7, is breakdown by segments. Majority of our revenue is coming from our wafer fabrication department or segment. Revenue is of small difference compared to our consolidated number. NT$35.07 is the segment revenue under foundry, and as a result, you can tell that new businesses has a very minor impact on overall consolidated numbers. On Page 8, we are looking at single digit decline in ASP in the previous quarter, third quarter of 2015. Page 9 our sales breakdown among different regions are relatively similar to the previous quarter. North America is of 45% and Asia is 41%. We see steady growth coming because of our Japan and Europe region. And for IDM it still represents about 12% of our total revenue in the third quarter of 2015. On Page 11, communication remained unchanged, account for 55% of our total revenue and consumer is another 27%. And 28-nanometer and below represent about 10% of our total revenue, similar percentage to second quarter of 2015, and 40-nanometer continue to show relative strengths with 25% of our total revenue in the third quarter. On Page 13 is our capacity breakdown by fab, and is above 1.6% increase in the third quarter, many coming from our 8-inch wafer fab in China region. And our capital expenditure plan for 2015 for foundry segment remains unchanged around $1.8 billion. And the above is the summary of UMC results of third quarter 2015. 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 Wen Yen

Okay. Thank you, Chitung. Hello, everyone. I’d like to update to everyone UMC’s third quarter operating results. In the third quarter of 2015, our foundry segment posted revenue of NT$35.08 billion with gross margin at 20.3%. Wafer shipment totaled 1.47 million 8-inch equivalent wafers, leading to an overall capacity utilization rate of 89%. Our 40-nanometer revenue contribution grew to 25% of total sales, driven by demand strength in communication and consumer segments. Our 8-inch utilization maintained above 95%, reflecting stable demand for logic and specialty applications. To better take advantage of the opportunities within mature nodes, UMC will leverage the advancements made in proven technologies to help customers compete in the IoT market. We recently announced volume production for touch controller ICs based on UMC’s 0.11um embedded flash process that uses the most aggressive aluminum metal design rules to strengthen customers’ product and market competitiveness through lower die cost. In terms of corporate sustainability, in the third quarter 2015, UMC was selected as a DJSI, Dow Jones Sustainability Index global component for the eight consecutive year. Although the continuing IC inventory adjustment will dampen fourth quarter wafer shipments, UMC continues on the path towards long-term growth. While Moore’s law continues, 28-nanometer remains a strong and long-lasting node, with many applications migrating to this geometry. Throughout 2015, UMC engineers have worked tirelessly to bring several new 28-nanometer product tape-outs into volume production. At the same time, we have also received multiple customer inquiries requesting optimized, cost-effective solutions derived from our fundamental 28-nanometer High-K-Metal Gate process. UMC is working to bring a timely conversion of new 28-nanometer requirements into production, which will strengthen our business. In addition, UMC is also leveraging mature node technology development to deliver specialty technology platforms addressing customers’ requirements, applications further diversifying our product mix. Going forward, UMC will continue to drive process innovations across leading edge and legacy technologies, as well as proactively expanding worldwide manufacturing services to support our growth in the IC industry. Now, please allow me some time to summarize the recent highlights in Chinese. [Foreign Language - Chinese] I finished my remarks and now let me go over the fourth quarter 2015 guidance. The fourth quarter wafer shipments to show a decrease of less than 5%. The ASP in U.S. dollar to decrease by approximately 1%. The UMC gross margin will be in high-teens percentage range. Our capacity utilization rate for the foundry segment will be in low 80% range. That concludes my comments. We’re now ready for questions. Operator, please open the lines now. Thanks.

Operator

Thank you, sir. And ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instruction] And first one is coming from Randy Abrams of Credit Suisse. Please ask your question.

Randy Abrams

Okay. Yes, thank you. My first question, I wanted to ask, if you can give an update on the 28-nanometer, if you expect that to rebound and grow as percent of sales in fourth quarter or it takes us getting through the inventory correction. And if you could look out into 2016, how you expect that to ramp as a percent of sales and within that the mix of High-K-Metal Gate versus Poly-SiON?

Po Wen Yen

Yes. Our 28-nanometer, we remain positive based on our customer engagement, and we probably need more time to see if sales are rebound in the coming quarters. However, our 28-nanometer we believe will reach bottom in end of this year or early next year.

Randy Abrams

Okay. So it starts to go after like beginning next year, it sounds like again. And maybe the follow-up more broadly with third and fourth quarter slowing down, could you give an update on your view of inventory getting back to normal and setting up even potential for first quarter to be seasonal or better. In the past few years seasonal, it seem like it was flatter or even up in the first quarter, if you think given the correction we could have that type of scenario.

Po Wen Yen

It’s our customer demand focus have been stabilized. And here, the customer inventory should move closer to reasonable levels in few months. And, as I mentioned just now, our foundry revenue, we believe will reach the bottom either in the end of this year or beginning of 2016.

Randy Abrams

Okay.

Po Wen Yen

So we are in - yes.

Randy Abrams

Oh, go ahead. Okay. If I could ask then, your CapEx and capacity outlook this year was 1.8 billion to add some 28-nanometer. Could you give a view on - there is some capacity you had pushed out to reach 29,000 to 30,000 on 28-nanometer, could you give an update if that capacity plan is moving ahead and if we should think similar level? I think in the past so it’s similar to operating cash flow for CapEx, but around 1.8 billion reasonable base-line again for next year?

Po Wen Yen

Our 28-nanometer capacity will reach the 30K by the second-half of 2016. So the - yes, the CapEx for - we are still considering on that our CapEx for 2016.

Randy Abrams

Okay. Okay. So it’s still being spared. I guess, for Chitung Liu, depreciation, it moved up this year on base-line plan, does that start to slow down after the increase this year, so could help gross margin a bit?

Chitung Liu

Well, unfortunately our depreciation policy is five plus one. So it’s going to last for couple of years. This year 2015 our depreciation expenses is expected to grow by 15% to 20%, and that’s likely to be the range for next year as well.

Randy Abrams

The range meaning is similar, depreciation or…

Chitung Liu

Gross rate, gross rate.

Randy Abrams

So another 15% to 20%, okay. All right, and thanks a lot for the updates.

Chitung Liu

Thanks.

Po Wen Yen

Thank you.

Operator

And the next one we will have Bill Lu, Morgan Stanley. Please ask your question.

Bill Lu

Yes, hi. Thank you for taking my questions. Your 8-inch wafer demand remains very high. Can you talk about what is driving that, the outlook for 8-inch demand going to next year and whether you can add some capacity to it if demand is good?

Po Wen Yen

Yes, our 8-inch, yes, mostly are pretty - I mean, still maintain pretty higher utilization rate. And, so I think it’s coming from across the board, communication and consumer. And, yes, mostly on the high-voltage driver and power management is some applications.

Bill Lu

Thank you. And what is the outlook for 8-inch next year?

Po Wen Yen

We don’t guide for the moment for the next year.

Bill Lu

Okay. And the last part of that question was, if demand does stay robust for 8-inch foundry in 2016, are you - do you have the ability to add some capacity?

Chitung Liu

I think, we being push our production capacity to almost maximum level this year in 2015. And we continue to do upgrade, as well as, increase the variety of technology. So I think for the time being that’s likely to be our key focus for 2015, also 2016.

Bill Lu

Okay. Got it. Changing topics on 28-nanometers, Mr. Yen made this comment, also it’s in the press release that UMC is looking to bring a timely conversion of new 28-nanometer requirements into production. Can you explain that to me? What are these new 28-nanometer requirements? Are the requirements changing now versus a couple of quarters ago? What’s going on there?

Po Wen Yen

That is we continue to evolve our 28-nanometer process platform. So it’s also a help on to provider ours, the better performance, lower cost of solutions to meet the customers’ requirement. So those we’ll continue to solve.

Bill Lu

Okay. If I look at your 28-nanometer, it’s sort of staying at this level, roughly 10% of sales. Do you think there is a concept that there is a window of opportunity, because may if I look at TSMC, they’re now in year-four of production, and they have reduced their cost quite significantly, right? And so, I don’t know exactly, but my guess is that their ASP is quite a bit lower than what it’s been three, four years ago. If you don’t get this ramped up, do you think that opportunities last whatever?

Po Wen Yen

Yes, I agree with that. And so, we are actually impacted by the market dynamics and plus our customer and also UMC. And however, based on our customer engagement we still continue being a positive to again the 28-nanometer’s market share. So our internal targets were achieved over 15% to 20% revenue share on 28-nanometer over by the second quarter 2016.

Bill Lu

That’s very helpful. Thank you.

Po Wen Yen

And based on our customer engagement we are also gradually increasing our capacity. So then we reached the 28-nanometer at economies of scale capacity, then we believe that by the end - by the second-half of next year and we believe that profitability will get improved.

Bill Lu

Okay. Thank you. Let me ask one last question and I’ll hand it off. 40-nanometer was quite good in the third quarter. Can you talk a little bit more about that, what drove that?

Po Wen Yen

Yes, it’s pretty much was drove by communication segment, especially Wi-Fi and the ISP, Image Signal Processor, and some mid low and application processors, and some baseband applications.

Bill Lu

Great. Understood. Thank you very much.

Po Wen Yen

Thank you.

Operator

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

Szeho Ng

Oh, hi, good evening. I just want to know the FX assumption for Q3.

Chitung Liu

The FX was NT$32.1 in the third quarter.

Szeho Ng

Okay. All right, okay. I see. And also in Q3 I noticed there is a very odd operating expense number. Could you explain a little bit to what it is?

Chitung Liu

Sorry, please say that again, please.

Szeho Ng

All right, yes, there is a very big odd operating expense number, NT$804 million. I just want to know what it is about.

Chitung Liu

We had impairment loss from the dollar subsidiary NexPower. They have extra impairment loss in the third quarter and we took about NT$100 million hit in the second quarter.

Szeho Ng

Okay. And should we expect more to come in the next couple of quarters or it’s pretty much done?

Chitung Liu

We are doing the execution, and of course, from accounting policy point of view, we have to take whatever we believe, so hopefully the execution is going to be on track, and we are still monitoring the subsidiary very closely.

Szeho Ng

Okay. All right. And what is still left on the balance sheet right now for that operation?

Chitung Liu

It take us for NexPower is about NT$2.8 billion.

Szeho Ng

Okay. I see you. All right. Got you. And a final question, could you comment a little bit about pricing environments for - especially for the 40-nano and 28-nano?

Po Wen Yen

Sorry. What was it?

Chitung Liu

Pricing, pricing…

Po Wen Yen

Pricing environment.

Szeho Ng

Okay.

Chitung Liu

We are seeing, see it’s on - it’s everywhere and every time, so the pricing is, yes. Anyway, we were doing all our efforts to improve our product portfolio, but those are niche and specialty customers and to improve our pricing structure for the 40- and 28-nanometer.

Szeho Ng

Okay. All right. And that for the 40-nano, is it all right for you to comment a bit that part of the operation? Did the margin, I mean, is already above their corporate average?

Chitung Liu

Yes.

Szeho Ng

Okay. All right. That’s good. Okay. Thank you very much.

Chitung Liu

Thank you.

Operator

And the next one is coming from Michael Chou, Deutsche Bank. Please go ahead.

Michael Chou

Hi. Thank you for taking my question. Two questions, the first one is, could you give some color regarding your portion for Poly-SiON and High-K-Metal Gate in 28-nanometer for next year? Second question is what is the outlook in these segments in Q4? Thank you.

Chitung Liu

The first question is respect to the portion of the Poly-SiON and High-K-Metal Gate. And, yes, for this quarter our High-K-Metal Gate version was much higher than Poly-SiON in terms of the revenue. And for the coming quarters we believe that the High-K-Metal Gate version will still dominate our 28-nanometer revenue contribution.

Michael Chou

Okay. Can we say that it could be more than 60% of total 28-nanometer from High-K in the future, I mean for next year?

Chitung Liu

Yes, based on our current product engagement.

Michael Chou

I see. Okay. Given your previous experience in 28-nanometer, is it possible we see some disappointment for your 28-nanometer in outpace next year, or you are quite confident that you can definitely end up your 28-nanometer mostly next year versus this year?

Chitung Liu

We feel that we have confidence that the 28-nanometer engagement and also the loading to continue to improve quarter-over-quarter for the 2016.

Michael Chou

Okay. Is it possible you can give some color for 28-nanometer self-portion by end of next year or it seems too early to highlight that at this moment?

Chitung Liu

Based on our engagement with customers, and the customers’ request, we see this 28 will be a long-lasting and a strong node. So it will be our growth driver for the coming years.

Michael Chou

Okay. Okay, thank you. And the second question, the outlook by segment in Q4?

Chitung Liu

Our Q4 we can - yes, across the board will decrease a little bit. And however the consumer segment is flat and communication will drop a little bit. Consumer will be the weakest one.

Michael Chou

So, what is driving consumer segment? I mean…

Chitung Liu

It has the PCB and set-top box.

Michael Chou

Thank you. Oh, I have no question. Thank you so much.

Po Wen Yen

Thank you.

Operator

And the next one we’ll have Gokul Hariharan, JP Morgan. Please ask your question.

Gokul Hariharan

Yes. Hi. Thanks for taking my question. My first question is on utilizations. Could you give some color on Q3 and Q4 by 12-inch and 8-inch in the splits and utilizations?

Po Wen Yen

So utilizations are, our Q4 for the 8-inch is that the high-80% range, and for the 12-inch it’s high-70% range.

Gokul Hariharan

And in Q3 overall was 89%, should I assume that 8-inch was pretty much all full?

Po Wen Yen

The 8-inch we just take the number around 95%.

Gokul Hariharan

Okay, okay. Just the second question, could you give some granularity into how you expect the Q4 to shape up? Do you expect revenue starting to drop off in October itself or you expect that to happen towards the end of the quarter. Just some granularity in terms of what you’re seeing as well as what have you been seeing from then the order trend from the customers also maybe in the last one or two months?

Chitung Liu

Yes. There is no particular pattern in the Q4 month over month. And what is the second question, is…

Gokul Hariharan

Yes. Just I think you did mention that you’re seeing some stabilization in the order patterns from customers. Is that something that has been happening for the last couple of months or is it something that is very recent and any expectations that you have or any forecast that you have in terms of how that is likely to shape up over the next - over this quarter?

Chitung Liu

Yes. It’s a kind of mix that we do see that is happening over the months but we do see some indication of the large share over there recently.

Gokul Hariharan

And on 28 specifically are you seeing any improvement in order rates or 28 is still relatively weak, because I think TSMC is also kind of commented the 28 is still probably the weakest node for them as well?

Po Wen Yen

I just explained our 28-nanometer utilization will be improved gradually. And we are targeting to come back to the first half of 2015 utilization in the Q3 next year.

Gokul Hariharan

Okay. Thank you.

Po Wen Yen

So it will be high-80% range.

Gokul Hariharan

Okay. Thank you.

Operator

And the next one is from Eric Chan, UBS. Go ahead, please.

Eric Chan

Hello. Probably just the two quick questions, the first on the capacity expansion that you don’t - would you mind, I probably lost it earlier, and in terms of capacity expansion, the growth for next year and for this year, and also in between the 12-inch and the 8-inch?

Chitung Liu

Yes. This year we are talking about overall above 5% capacity growth for UMC as a whole, and for 12-inch is around 12%. And we don’t know the capacity breakdown for next year yet, but we do have these 90,000 8-inch wafer capacity line up ready to be installed sometime after mid of 2016. At the same time, our Xiamen fab is also under construction. By the end of 2015, they will all be also some initial production. So, say, in terms of exact numbers we will disclose maybe on next quarter.

Eric Chan

Okay. And for the Xiamen fab, the capacity, the schedule, I remember you mentioned earlier is 6,000, right, by end of next year?

Chitung Liu

Yes, by the end of next year, it’s between 3,000 to 6,000 wafers. So end of 2016 we will start to see initial production.

Eric Chan

Okay. And, sorry, 3,000 to 6,000 right by end of next year for Xiamen.

Chitung Liu

Yes, 3,000 to 6,000 by the end of 2015.

Eric Chan

Okay. So 90K on capacity expansion, in terms of the growth rate next year, should we have the gross rate we have this year, right?

Chitung Liu

Well, again, we don’t have the numbers. So this year, we also had a lot of capacity in 28, initially, we’re starting from low-teens, and now we have 2045. So also around 10K 28 installed in 2015. And for Xi’an [ph] in China also have a lot of 5-inch wafer capacity.

Eric Chan

Okay. So for the 8-inch, your capacity expansion, how many percent year-on-year growth for this year?

Chitung Liu

We probably have to do the math. So 5% overall for the company, 12% - 7% for the 12-inch, so maybe less than the average of 5% through 6% or 7% or so.

Eric Chan

Okay.

Chitung Liu

We have big data range so 2% is quite good.

Eric Chan

Okay. And the utilization rate for the 8-inch, I mean, for the whole year, and always pretty high, so what my sense for - I mean for to - I mean, we know that 28-nanometer process, the competition is quite critical. But to certain extent 8-inch is quite a profitable business for UMC, right? How - I mean, how come all the capacity expansion for the 8-inch, where is it, a very slow this year, and how about next year. How should we look at it?

Chitung Liu

For 8-inch has quite a profitability largely due to the depreciation has been fully depreciated. If you buy brand new equipment to do 8-inch, it may not be as competitive as 12-inch. And besides, all the new leading edge technology on 12-inch is here evolving and we still have a lot of customer, we can penetrate. So that’s why we still save most of all capacity on 12-inch instead of 8-inch.

Eric Chan

I see, very clear. And the one very quick question, in term of the ISP for the manufacturing UMC using the 40-nanometer process, that’s for the sensor, right?

Chitung Liu

Yes, many on the communication, connectivity, baseband, and some mid low and high application processors.

Eric Chan

Okay. So what ISP mean, I’m sorry, I don’t get it.

Chitung Liu

Image Signal Processors.

Eric Chan

Supposedly, right, so that’s the - how can I - how can I, signal process, and the many application part is…

Chitung Liu

For handsets.

Eric Chan

Handset, I see. Okay. Very clear. Thank you very much.

Chitung Liu

Thank you.

Operator

And the next one is from Roland Shu of Citigroup. Please ask your question.

Roland Shu

Hi. Thanks for taking my question. First question is on for last quarter you expect in 4Q, 28-nanometer contribution to be close to 3Q label. So is this we still hold or it had been changed your view from last?

Chitung Liu

Yes. We still hold the view.

Roland Shu

So we can expect 4Q 28-nanometer revenue to be close to 3Q label, right?

Chitung Liu

Yes.

Roland Shu

Okay. And also for 28-nanometer you expect by second quarter next year either will be above 15% to 20% of the total revenue, so after that in second half of next year, well, 28-nanometer contribution to maintain the same level or either will be dollar increase?

Chitung Liu

Our internal targeting is it will be gradual increase quarter-over-quarter.

Roland Shu

In dollar amount point of view or in the percentage point of view?

Chitung Liu

In revenue share percent - revenue share.

Roland Shu

Revenue share, so it’s a percentage point-of-view, right?

Chitung Liu

Yes.

Roland Shu

So can we expect on your by end of next year, the 28-nanometer will be - the revenue contribution will be above 20%?

Chitung Liu

For the full year, we don’t guide that, yes, yes.

Roland Shu

Okay. By the end of next year, seems that you have gradually increased from 15% to 20% in second quarter next year. So can we assume by end of next year, either it will be more than 20% of total?

Chitung Liu

That is our target.

Roland Shu

Okay. Thanks. And also, for 28-nanometer actually if you look at this year, the overall 28-nanometer revenue overall, gross margin more than the overall revenue growth. And that means on your, except for 28-nanometer, the other nodes, the overall revenue actually had been declined. So is it a normal case going forward for next year? Since, it looks we also will have very strong growth for 28-nanometer. But for the other nodes, are we going to see the overall revenue to decline or the other revenue will be continue to grow same as 28-nanometer?

Po Wen Yen

Yes. For this year actually our 28-nanometer revenue we have very steady and strong growth, yes. So, yes…

Roland Shu

Yes, yes, I know that, but for the other non-28-nanometer actually the overall revenue had been declined for this year. Yes, will that be the same next year?

Po Wen Yen

Yes, some node, yes, some node relatively weak than 40. And we believe the - we are actually - we identify a number of applications which were migrating from 8-inch to 12-inch. So we are expecting in the second-half of 2016, our 12-inch mature node utilization rate will be improved.

Roland Shu

Okay. So that means for next year actually the growth for 40-nanometer, even 65-nanometer will be much faster than this year?

Chitung Liu

40 is already strong, like as we know the mature node for 12-inch, mainly 65 being 80. CEO mentioned by second-half of next year. We expect our application will be able to lift the overall capacity utilization rate for those are proactively more mature 12-inch node.

Roland Shu

Okay. Okay. Understood, thanks. Last question to ask for my - is for the progress for your advanced packaging technology. So where are you now? And how are you going to differentiate your packaging technology versus TSMCs InFO base?

Po Wen Yen

Yes. We’re still working. We’re still focused on the solution with working with our customer and that is on 2.5D TSV technology. And we are also collaborating with some research institute on providing a small device 2.5D technology in the future. Now, the active 2.5D technology is by adopting the silicon in the interposer technology.

Roland Shu

So, are we going to see any revenue contribution for this 2.5D or TSV technology next year?

Po Wen Yen

We already have some contribution from this technology.

Chitung Liu

Yes. We had press release last quarter regarding AMD adopting the packaging, so is already a conduct in our revenue contribution.

Roland Shu

Okay. Yes. So how about the growth next year, this going to be significant, say, contribute about 2% - 3% or 5% of total revenue next year?

Po Wen Yen

We don’t have the number right now. That still is growing with the customer for this growth.

Roland Shu

Okay. Understood. So and on this how part of the profitability or margins for this 2.5D or TSV packaging. Is it above corporate average or below corporate average?

Po Wen Yen

I think that this belongs to a specialty technology. Normally, this is - it adopted existing tool technology. So, normally, it will be ever enjoy a better profitability than other technologies.

Roland Shu

Understood. Thank you. So, going forward for this package technology actually will be correct by the specialty technology. So, we can see the growth on your specialty technology, because of this high-end advanced packaging technology, am I right?

Po Wen Yen

That’s correct.

Roland Shu

Okay, thank you.

Po Wen Yen

Thank you.

Operator

And the next one is from Eric Lin, CIMB. Please ask your question.

Eric Lin

Hi, Chitung, would you give us some idea about the currency impact? If you strip off the currency fluctuation, what would be the margin outlook, so what would be the margin for third quarter gross margin wise?

Chitung Liu

Well, the Forex now about 3.9% revenue in the third quarter, every 1% increase in currency will help our gross margin by roughly 0.5 percentage point.

Eric Lin

Got it, got it, thank you. Then my second question is on the inventory layout. Third quarter inventory was up three days and Po mentioned that we are expecting the inventory level to come to a reasonable level in the coming one or two quarters. So, what would be the reasonable level in terms of days?

Chitung Liu

I think that would be four, five figures, maybe one or two days less in the coming one and two quarters.

Eric Lin

So, that would be like 50 days, would that be reasonable?

Chitung Liu

Yes.

Eric Lin

Yes. Thank you. Last quarter, the management mentioned about the progress of 40-nano, would you update us about the progress right now? Are we still expecting the same ramp up stage and the equipment moving schedule?

Po Wen Yen

Yes. Based on our current development roadmap, we are still on track on course to engaging with customers. So, we are expecting the customers’ tip-off [ph] by the end of this year.

Eric Lin

So, I would assume that CapEx should be spent maybe earlier next year?

Po Wen Yen

No. This is the early gustigo [ph] tip-off and it’s not the product tip-off.

Eric Lin

I see.

Po Wen Yen

So, we are expecting the revenue contribution, we’ll likely have them on the middle 2017.

Eric Lin

Okay. So, in that case, I think we have to spend money on the equipments on maybe second-half next year or early next year, right?

Po Wen Yen

We already have some R&D capacity there.

Eric Lin

So, were that ramp-up - I mean, were the CapEx for the 14-nanometer the stream [ph] factor for our next year’s cash flow?

Chitung Liu

Yes. For the time being it probably won’t. So as our CEO mentioned, revenue is not expected until second-half of 2017 or mid 2017. So, it’s unlikely to have significant amount of CapEx on 14 in next year.

Eric Lin

I see. My last question is, will that be reasonable for us to assume the 28-nanometer revenue will be holding at about 10% for Q4 and 14-nanometer will be stay at 25%?

Chitung Liu

It’s about the - all the correct numbers.

Eric Lin

I see. So it will be pretty similar with third quarter, right?

Chitung Liu

Yes.

Eric Lin

Okay. Thank you so much. That’s all from me. Thank you.

Operator

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

Steven Pelayo

Yes, Chitung, some clarification first of all, I think you’re saying depreciation is going to grow 15% to 20% this year. I think with only one quarter left in the quarter - in the year that would imply a very significant increase in the fourth quarter, double-digits, just even get 15% year-on-year, and probably much more to get 20% year-on-year. So is 15% to 20% still the right number, or what are you thinking about for fourth quarter depreciation?

Chitung Liu

Yes. 15% to 20% still the right number. Third quarter alone increased 7.3% quarter-over-quarter. And, yes, Q4 were still some similar or higher quarter-over-quarter growth rate.

Steven Pelayo

Okay. So then, how do you issue gross margin guidance that’s kind of similar quarter-on-quarter? Utilization rates are falling, revenues are falling and depreciation is going up. So what are the things that are helping gross margins?

Chitung Liu

Currency help a little bit and also we have higher utility costs in the third quarter. And most importantly we’re seeing we have made some progress in terms of yield. And we use to suffer some heavy back to customers in terms of EOE issue, but Q4 will have seen meaningful improvement.

Steven Pelayo

Okay. Interesting. I think you said that you expected 28-nanometer utilization rates to gradually improve and targeting to come back to the high-80s range by the second quarter. What is the current utilization rate of 28-nanometer?

Po Wen Yen

It’s above 50%.

Steven Pelayo

Okay. And are you utilizing any of that 28-nanometer capacity to maybe address some of your 40-nanometer demand or…?

Po Wen Yen

Well, there are some transparent, but we’ll - the best case we’ll - but certainly we’ll have to use all our 28-nanometer capacity for 28-nanometer products, so mainly we focus on 28-nano.

Steven Pelayo

Maybe I should ask the question the other way. 40-nanometer isn’t so strong for you. Are you tight on capacity with 40-nanometer, the utilization rate?

Po Wen Yen

Yes. For the recent quarters, yes.

Steven Pelayo

Okay. And last question for me is you had pushed out your 28-nanometer ramp to reach, I think 30,000 wafers now some time mid next year. I guess, you wouldn’t go from 20 to 30, if you didn’t feel like you have that full. Does that seem like a reasonable expectation for us right now, that we can assume you’re generating 20,000 wafers a month of 28-nanometer revenue by mid next year?

Chitung Liu

We are saying, Steve, that’s your fair analysis. And we do expect to see as our CEO mentioned the 28-nanometer. In addition, it should rebound to the first-half level of this year first, then gradually go up quarter-over-quarter, as seen that from the all the assumption and belief we have for our customer engagement.

Steven Pelayo

Okay. That’s fair enough. I guess last, I just want to mention, I know you guys did buyback some stock. I think it was about $0.11 stock price. That’s not that far different from today. Do have any more plans to continue to acquire shares?

Chitung Liu

We do have resources. If we feel there is opportunity or there is a necessity in the market, so always we are open to that.

Steven Pelayo

Okay. Fair enough. Thank you very much.

Chitung Liu

Okay.

Operator

Ladies and gentlemen, we are running out of time, so we are taking the last question. Your last question is from Carlos Bubon, [ph] Jefferies. Please ask your question.

Unidentified Analyst

Good evening, Po Wen and the Chairman [ph]. Regarding China SMIC and Huahang-race [ph] is seeing a very strong order flow for 8-inch from 2Q to 4Q, which is nearly 40 UCI [ph] from the SMICs 8-inch capacity from the second quarter to the first quarter, especially in the payment [ph] IC, fingerprint and the MEMS segment, and partial of the order flow are currently waiting for the capacity in the SMICs and new sensor-fay [ph]. So does that will pose any market share dues to reach on the UMC’s 8-inch business over the 2016, or are there any other the strong product to secure UMC’s market share over the next year?

Chitung Liu

Sorry, we don’t comment on our competitor. And for the 8-inch, the demand we’re still - we’re working very closely with our customers to engage more, the coming demand for the 2016.

Unidentified Analyst

Okay. Okay. Thank you.

Chitung Liu

Thank you.

Operator

Thank you, sir. And 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

I would like to thank everyone for being on the call today. We appreciate your questions. If you have any additional or follow-up questions please feel free to contact UMC at ir@umc.com. Operator, please wrap up the call.