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United Microelectronics Corporation (NYSE:UMC)

Q1 2014 Earnings Conference Call

April 30, 2014 5:00 AM ET

Executives

Bowen Huang – IR

Po-Wen Yen – CEO

Chi Tung Liu – CFO

Analysts

Dan Heyler – Bank of America Merrill Lynch

Randy Abrams – Credit Suisse

Andrew Lu – Barclays

Bill Lu – Morgan Stanley

Steven Pelayo – HSBC

Gokul Hariharan – JPMorgan

Roland Shu – Citigroup

Michael Chou – Deutsche Bank

Donald Lu – Goldman Sachs

Szeho Ng – BNP

Operator

Welcome everyone to UMC’s 2014 First Quarter Earnings Conference Call. (Operator Instructions). 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 First 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 hear our CFO present the first quarter financial results followed by our CEO’s key message to address UMC’s main area of focus and UMC’s second quarter 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 call we may make forward-looking statements based on management’s current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company’s control. For these risks please refer to UMC’s 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 first quarter 2014 business results.

Chi Tung Liu

Thank you Bowen. For the first quarter of 2014 revenue was NT$31.69 billion with a gross margin around 18.6% and operating margin of 3%. The net income attributable to the stockholders of the parent, was NT$1.18 billion. And the earnings per ordinary shares were NT$0.09.

And now I would like to go through our financial PowerPoint file, which has been posted on our IR website. If you refer page 3 you can see that there is operating results summary for first quarter of 2014 our capacity utilization rate was 81% and the wafer shipment was 1.258 million, 8-inch equivalent wafers, for the cash on hand currently staying around NT$53.9 billion.

On the following page, we can see a quarter-over-quarter comparison; revenue grow 3.2% to NT$31.69 billion and gross margin was NT$5.9 billion and operating income was NT$941 million, and for the net income is NT$1.11 billion or again EPS is NT$0.09 per share. In terms of year-over-year comparison revenue grew 14.1% and gross margin grew 31.4% to NT$5.9 billion and at the same time operating expenses also grew at around 20% to NT$5 billion.

So same time last year we had this bargain purchase gains in the non-operating item around 7.2 billion but this year we don’t have that. So the net income is around NT$1.11 billion. And for balance sheet highlight on page 6 other than NT$53.9 billion cash we also have total assets is close to US$10 billion or NT$301 billion in total assets.

On page 7 there is operating segment break down. For our new business we have reported a better performance in the first quarter of 2014 with revenue of almost NT$3 billion and the net income loss has narrowed down to NT$219 million.

On page 8, our ASP in Q1 declined roughly 3% to 4% in first quarter. Page 9, in terms of our geographic breakdown, Asia grew to 45% of the total revenue and North America declined to 45% from 47% in the previous quarter. On page 10, IDM continued to shrink as a percentage of total revenue. It's now around 8% of our total sales in Q1, 2014.

Communication is still our largest sales break down by application on page 11, which represented around 46% of the total pie and consumers stayed unchanged around 31%.

We continue to have expansion in the leading edge revenue for 65-nanometer now is 31% of the total revenue, 2% more than the previous quarter of 29%, and 40-nanometer still stay above 20% in Q1, 2014.

On page 13 we have quarterly capacity break down and we see a mild increase in the first quarter of 2014 partially offset by the fewer working days in February. In quarter two, we will see the capacity increase continue to resume and to about 1.6 million wafer per quarter in the second quarter of 2014.

And finally our capital expenditure plans stay unchanged, the current budget of 1.1 billion to 1.3 billion stay unchanged. And this is a summary of our results for first quarter of 2014. And 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

Thank you Chi Tung. Hello everyone, I would like to update to everyone UMC’s first quarter operating results. In the first quarter of 2014 UMC recorded NT$28.71 billion in revenue from the foundry segment, with operating margins from foundry operations of 4%. Wafer shipments reached 1.258 million 8-inch equivalent wafers.

In a seasonal quiet quarter, UMC’s first quarter of 2014 foundry performance exceeded guidance, driven by continuous chip demand that brought overall capacity utilization to 81%. Growth was led by the computing sector. As a result contribution from 65nm and below technologies represented 51% of sales including 20% from 40-nanometer.

From 28-nanometer our communications and consumer customers continue to be encouraged by our sustained yield improvement. While average 28 nanometer yields have shown stable performance the continuous rise in our peak wafer yields will be a convincing factor for customers to enter the pilot production in the coming months.

UMC also continues to focus on capturing fast growing opportunities and further expanding our market share in China. Recently UMC hosted its 2014 China Technology Forum in Shanghai to demonstrate our manufacturing excellence and comprehensive coverage of semiconductor applications.

With 20 years of pure play foundry experience, our technology leadership in logic and specialty solutions will help us gain additional design wins in the Chinese fabless industry.

For the second quarter of 2014 UMC will benefit from the continued growth in semiconductor - in customer demand especially from the communications segment. We expect increased wafer shipments and higher capacity utilization rates to drive better profitability. As the leading edge 40 nanometer demand continues to show strength while 28 nanometer business is gaining momentum.

We’re confident that our engineering team’s steady progress in 28 nanometer yield enhancement activities will help UMC to capture key business and achieve strategic goals in the near future. We will continue to execute and take necessary steps to prepare our future growth.

In the long-run we will further strengthen our technology solutions and service quality to enhance shareholder returns.

Now please 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 second quarter 2014 guidance.

The foundry segment wafer shipments to show an increase of low teens percentage range. Foundry segment ASP in U.S. dollars will remain flat. UMC’s foundry segment gross profit margin will be in mid-20 percentage range. Capacity utilization rate for foundry segment will be at high-80% range. 2014 CapEx of foundry segment will be in the range of US$1.1 billion to US$1.3 billion. The guidance for new business segment’s revenue to be approximately NT$3 billion and operating loss to be approximately NT$0.05 billion.

That concludes my comments. We’re now ready for questions. Operator, please open the lines up. Thanks.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Dan Heyler, Bank of America. Go ahead please.

Dan Heyler – Bank of America Merrill Lynch

I had a few house-keeping questions. I wanted to ask what your total capacity, year-end capacity is expected to be and if you could give out how much of the net capacity is for 20 nanometer.

Po-Wen Yen

Our total capacity for 2014 will be - for 28 nanometer will be increased from 10k per month now to 12k per month in the 4Q, 2014 and so far we don’t have plans for 20 nm capacity expansion.

Dan Heyler – Bank of America Merrill Lynch

10K now to you said 15K by year end?

Po-Wen Yen

12,000 per month in Q4 - 4Q end of this year.

Dan Heyler – Bank of America Merrill Lynch

Okay, and when would you expect 28 to contribute say 3% of sales, when could you achieve a few percentage point of sales contribution of 28 nanometer wafer.

Po-Wen Yen

Yes. Our 28 nanometer is progressing well and we expect our 28 nanometer will represent 1% of total sales in 2Q ’14.

Dan Heyler – Bank of America Merrill Lynch

And then what’s the target for the fourth quarter then, does that kind of get to 5% by the end of the year then, is that the scenario right now?

Po-Wen Yen

We also expect to have more than 5% of revenue from 28 nanometer in 4Q, 2014.

Dan Heyler – Bank of America Merrill Lynch

And then I was also asking the same question on 40 nanometer, because SMIC has also talked about demand for 40 to [reenter] [ph] that market. So it looks as though there is increased competition. What do you think the contribution of 40 nanometer should be by year-end? I guess right now it's running at about 20% of sales. So does that increased contribution of sales throughout the year, will that increase to - as percentage of sales by year-end?

Po-Wen Yen

Yes. Our 40 nanometer revenue contribution will be around 20% in 2Q this year and I expect it will be around December to the end of this year.

Dan Heyler – Bank of America Merrill Lynch

Okay, so it is growing pretty much in line with your overall business. What areas are driving 40 nanometer? Is it migration from 65 or are there other new product areas coming in that you’re noticing on 40 because again as I said it seems as though there is definitely more competition in that space. I’m wondering what’s driving the growth there?

Po-Wen Yen

I think part of it is technology transition from 65 to 40 nanometer but mostly is we have engaged more customer base to gain more business on 40 nanometer worldwide.

Dan Heyler – Bank of America Merrill Lynch

So you are taking some share, what areas do you think you’re taking share? Which specific segments and products?

Po-Wen Yen

[Inaudible] communication and there are some specialty but it’s mainly on communication and consumer area, yes.

Dan Heyler – Bank of America Merrill Lynch

Chi Tung, I guess I wanted to get the some of the depreciation numbers for the second and third quarter if you could? What you’re anticipating there? I know you haven't changed CapEx but I’m just wondering, I want to make sure that we have the current numbers for depreciation.

Chi Tung Liu

Yes, for this year it's going to be less than 10% increase as the whole year. And quarter one show low single digit increase over the previous quarter and then the rest of 2Q, 3Q just linear.

Dan Heyler – Bank of America Merrill Lynch

Okay, maybe just a final observation that there has obviously been a very broad pick-up; inventory has been very low across the supply chain and every foundry is seeing a pick up [so your above] [ph] seasonal second quarter. Do you anticipate, looking at the third and fourth quarter should we see things track more seasonality again after [above] [ph] seasonal second quarter? Or are there certain areas where you think you could grow faster than seasonality, and if so what would those drivers be for the second half?

Po-Wen Yen

We currently do not have enough visibility on second half of 2014 foundry business.

Operator

The next question is from Randy Abrams, Credit Suisse. Go ahead please.

Randy Abrams – Credit Suisse

The first question I wanted to ask on the gross margin where you’re guiding to mid-20s for the second quarter in the foundry and looks like a few points above where you reached last year. Could you maybe talk about the mix or some of the factors that look like it's lifting a bit your margins versus what you did last year?

Po-Wen Yen

Well, the higher the better, right?

Randy Abrams – Credit Suisse

Yes, no, no, it’s good news.

Po-Wen Yen

I think nothing really different in the parameters. I think same time last year we had some [inaudible] in leading edge in wafers which probably -- the OpEx number, the operating margins will reflect that, and for gross margin we don’t really see any major difference compared to before.

Randy Abrams – Credit Suisse

And for the sales, if you can give a bit more color, you mentioned 40 tracking somewhat similar to average. Is there any difference across the end market verticals and as a whole if you take the 12 inch versus the 8 inch piece if one is picking up more than the other?

Po-Wen Yen

Yes, for the 2Q, ’14 our 8-nch wafers capacity will be kind of [4] [ph] and for 12-inch what we see from now is will be low 80 percentage utilization rate.

Randy Abrams – Credit Suisse

Okay and by application?

Po-Wen Yen

By application, communication will be stronger growth. In base band and Wi-Fi and drive ICs, and both of the ISP and for computer the NAND and touch and hard disk drive ICs (inaudible) and in consumer the power management ICs will be -- increased.

Randy Abrams – Credit Suisse

Okay and for 8-inch where you’re now going to be full by second quarter how are you looking at your capacity basis? Is there an area to or are do you see the need to expand some of existing fabs for look for new capacity, how do you position if you see demand continue to come on 8-inch.

Po-Wen Yen

No, we’re continuously doing the debottlenecking across our 8-inch wafer fabs and at the same time our newly acquired Chinese fab presents some new capacity inflows. So their capacity is shooting from I think previously it was 40 to 42 case and now it's 45 to 46 case at least. So if necessary there’s still space again for 8-inch wafer fab expansion.

Randy Abrams – Credit Suisse

Final question I wanted to ask on the next node. It's probably a little early to think about it but you have the IBM license for 2014 the next node. How do you see the license now where it looks like Samsung and GlobalFoundries are moving more toward a Samsung lease licensing mobile foundries and so do you’ve option, is the campaign shifting toward Samsung driving the technology and you’ve option to license that or is it, it's still your plan for -- I think your IBM -- even through 10 nanometer. How do you see that progressing?

Po-Wen Yen

Our 40 nanometer FinFET technology will be, I think we actually work with our customer. We align with our customer and we will be available for customer take off. We’re targeting by end of this year and I like to leverage it a little bit more from three assets. First, is we are leverage the module technology from IBM already just addressed and from 20 nanometer down to the 10 nanometer FinFET JV program. The JV program, actually sent our R&D demand there to join the development. Second, we also used the third party secularization vehicle through major position UMC (inaudible) level. And also the identifying UMCs target [weak] spot to accelerate UMCs learning curve in the early stage and third is we also align with our customer to enhance the (indiscernible).

So this is to advertise our 40 nanometer FinFET technology platform in order to fulfill the requirement of 40 FinFET products performance from our customer. So, that is I will conclude, we depend on 40 FinFET development and technology.

Operator

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

Andrew Lu – Barclays

(Foreign Language)

Po-Wen Yen

(Foreign Language). We’re talking about operating profit margin, we don’t really have a number to stimulate past utilization rate. However, this quarter our guidance is mid 20 for gross margin and operating expenses will be slightly higher than that in first quarter of 2014 and for the rest of the year operating expenses probably will stay in the same percentage range of revenue and we’re still in the IBM JV alliance for technology development and at the end of this year that project will be concluded and we won’t be able to save some R&D expenses because of that and if everything goes well we don’t see any reason why our operating profit margin will be different compared to few years back when we had similar capacity utilization rate.

Andrew Lu – Barclays

And you mentioned operating expenses will be higher than the first quarter, was the percentage increase more than the revenue increase or less than revenue increase?

Po-Wen Yen

It should be less than revenue increase.

Andrew Lu – Barclays

So the op margin improvement should be larger than gross margin improvement?

Po-Wen Yen

Sure.

Andrew Lu – Barclays

My second question is 28 nanometer breakdown. By Q4, earlier you mentioned it will be over 5% contribution by Q4, do we have a kind of a portion what percentage will be High-K/Metal Gate -- and what percentage will be probably [same]?

Chi Tung Liu

For 4Q I would say we are targeting 28 nanometer High-K/Metal Gate -- version from the revenue.

Andrew Lu – Barclays

Largely exceed or slightly over?

Chi Tung Liu

Slightly over.

Andrew Lu – Barclays

And last question, for next year what’s our plan on 28 nanometer finishing? Earlier you mentioned it will be (inaudible) by the end of this year, how about next year by the end of next year what kind of capacity we will have for 28 nanometer?

Po-Wen Yen

We will take a relative approach on capacity expansion on these 28 nanometer capacity. So, we will have economies of scale for 28 nanometer capacity like we built for 65 nanometer in the past year.

Andrew Lu – Barclays

No numbers?

Chi Tung Liu

No numbers.

Operator

The next question is from Bill Lu, Morgan Stanley. Please ask your question.

Bill Lu – Morgan Stanley

Follow-up on Andrew’s question, I don’t know if my math is right I did it very quickly but assuming to get a stage of 5% or 6% revenues for 28, your capacity is 12,000 wafers a month, that’s basically saying that it's going to be all utilized by the end of the year. Is that right?

Po-Wen Yen

Right. We still have some buffer capacity for 28 nanometer, besides we do have some flexibility between 40 nanometer and 28 nanometer. So, it's a little bit fuzzy if you will right now in terms(inaudible).

Bill Lu – Morgan Stanley

So, if you look at the 28 and compare that to a 40 or 65, if you get 40 as an example it got to about 20% of revenues. As you look forward obviously not now but couple of years, do you think 28 could be that big? I think there are some differences, 28 you’ve ramped probably little bit slower than you did 40 and yet it looks like the NAND overall for 28 is being pretty strong in the near terms . How do you think about that?

Po-Wen Yen

I will expect our 28 nanometer revenue share. We -- because that 28 nanometer is a long life node and it will also be strong node. So, we believe the 28 nanometer -- will be very fruitful for UMC according to our current engagement with our capital.

Bill Lu – Morgan Stanley

Great. Sounds like you are pretty bullish on 28, and then just a clarification, is sounds like in the second quarter, 8-inch is going to grow faster than 12-inch and yet you’re saying that ASP is flattish? So is that because you got a bit of 28 and 40 is growing and that’s improving the 12-inch ASP or how do I think about that?

Po-Wen Yen

That’s pretty much right and also some of the price erosion we see at the beginning of the year will not repeat in the second quarter given the tightness in capacity demand situation.

Bill Lu – Morgan Stanley

Got it and just circling back to 28, one last question, how many customers you think you will have at 28 by the end of the year?

Po-Wen Yen

We are currently, we have more than 20 customers engaged. And more than 40 products in 28 nanometer.

Operator

The next question is from Dan Heyler, Bank of America. Go ahead please.

Dan Heyler – Bank of America Merrill Lynch

I just wanted to follow-up a little bit on the I know you’re early stages of 28 but next year if you hit a bigger level of ramp from just a small 10k. How can you possibly take meaningful share interest in terms of number one the massive scale disadvantage you’ve relative to (inaudible). Number two, there is GlobalFoundries, there is Samsung and there is even SMIC trying to make a run at that business. So I just wonder how confident you’re and what your strategic is really be able to do much in 28 nanometer at this point in the game given how small your scale is going to be.

Po-Wen Yen

Yes. Our 28 nanometer technology offering, we’re especially the High-K/Metal Gate version. UMC is one of the two, we can offer the Gate-Last High-K Metal Gate technology and so we have achieved meaningful progress and within a year enhancement and we expect we will enter the risk provided in that coming several months. So, we haven't seen our capacity on 28 nanometer.

Dan Heyler – Bank of America Merrill Lynch

You think, as far as a second source goes, you’re in a leading position relative to Global Foundries, is what you’re saying you’re ahead of Global Foundries as a second source for High-K Metal Gate, Gate-Last?

Po-Wen Yen

Yes again as I mentioned you have to acknowledge that we are only -- that there are only two companies that can offer that Gate-Last High-K Metal Gate version. And we believe we’re in a pretty good position to becoming a more stronger position in second source.

Dan Heyler – Bank of America Merrill Lynch

Correct me if I wrong Samsung has said they also have now have Gate-Last as well and GlobalFoundries I understand is also offering High-K Metal Gate, Gate-Last we well, am I mistaken?

Po-Wen Yen

I don’t comment on our competitors and on their strategy.

Dan Heyler – Bank of America Merrill Lynch

Okay, I see you disagree because you’re the only provider of High-K Metal Gate and that’s how you’re going to take care. On the second part in terms of scale and efficiency, so the take share I guess maybe explained there will be, well you need to be pricing driven or would you pursue more of a specialty area where you would focus your capability to turn areas or pricing or combination of things maybe just elaborate for us why someone would use UMC versus their current supplier?

Po-Wen Yen

So as I just mentioned we will also focus on our specialty technology offering. So again we have very comprehensive specialty technology platform and a pretty good position in many areas for example high voltage areas and driver areas. So we’re pretty confident on -- engage more business in that specific technology.

Dan Heyler – Bank of America Merrill Lynch

No probably specific to 28 nanometer node?

Chi Tung Liu

As you’ll mentioned that we’re in a good position in terms of High-K Metal Gate and also have many customers engaged already in the pipeline. We’re waiting for our 28 nanometer business which including specialty purpose as well. So for the time being we’re pretty confident and like as you all mentioned earlier, we’re likely to take an aggressive efforts on the 28 nanometer (inaudible) of course it will depend on customer adoption rate.

Operator

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

Steven Pelayo – HSBC

I guess I will follow-up there. If you want to be aggressive at 28 nanometer and you want to have 65 nanometer like economies of scale it makes me have to ask about CapEx next year especially if you’re only adding roughly 2k more of 28 nanometer this year for the current 1.2 billion in CapEx. If you want big 65 nanometer like economies upscale I would suggest a lot higher CapEx next year. So any thoughts on reconciling your comment about aggressive capacity expansion for 28 nanometer versus CapEx plan?

Chi Tung Liu

Lot of money spent this year for equipment delivery next year. So roughly you can use [120 million] as opposed to 1k, 28 nanometer capacity. So the money we spend this year roughly speaking -- about 10k but it won't be all delivery this year.

Steven Pelayo – HSBC

I’m just curious last question, what kind of scale do you need in 28 nanometer to have around corporate average that gross margin in that node. Do you need to have 20k worth or 30, I have no idea. Can you help us understand what kind of scale you need?

Po-Wen Yen

As I mentioned earlier with 28 nanometer or the long life and strong nodes. We will align with our customers, we will demand forecast and of course it also depends on EMCs technology and (inaudible) revenues. So, we’re looking for longer range in that. So, all economics of scale, we just tell about, we have reached the 65 nanometers range something like that.

Steven Pelayo – HSBC

Let me ask the question in another way, you said in the fourth quarter you were thinking about something more than 5% of revenues coming from 28 nanometer. If you’re running that amount of wafers I don’t know it's probably 5k to 10k per month somewhere in that range, 7k to 10k per month depending on whatever [ASP will use]. Is that a breakeven gross margin level? Is that a breakeven operating margin level? Help me understand how it scales with the amount of wafers you need to breakeven at 28 nanometer versus then actually getting to kind of corporate average growth margin.

Chi Tung Liu

It's largely depends on loading more than anything else. So if we can fully utilize the capacity of 28 nanometers and we will definitely be break-even, above break-even for the operating levels.

Operator

The next question is from Gokul Hariharan, JPMorgan. Please ask your question.

Gokul Hariharan – JPMorgan

Another quick question on 8-inch capacity tightness as well as potential conversion to 12-inch basically 90 nanometer or 65 nanometer. What is the trend that you guys are seeing in some of your major products especially like driver IC in terms of potential conversion to 12-inch wafer size maybe end of this year or early next year? Thanks.

Po-Wen Yen

For the driver IC, we do see the growing market and the transition from 8-inch but it is quite based on demand situation– and we do see a pressurized demand situation recently. I don’t have a clear picture now on how much transition from 8 inch is.

Steven Pelayo – HSBC

Maybe I will ask it in a different way. Is it something that you’re actively encouraging clients to do? One, and second, is it something that is only applicable for high volume, very high volume kind of products like high mix low volume kind of products or are they like (indiscernible) even some of the driver IC stuff is it still going to be staying at 8-inch for a much longer period of time, even though there is a significant shortage or tightness of 8-inch capacity.

Po-Wen Yen

It depends on how our customers demand and it says on customer demand situation.

Steven Pelayo – HSBC

Lastly one follow-up on the new solar and other businesses. How should we think about the profitability trend, based your guidance, it looks like the losses are expanding a little bit again in Q2? Is it something where we will see some kind of limited losses coming through in second half of the year or is it fully dependent on market dynamics in the solar market.

Po-Wen Yen

There are several positives in the trend in the first quarter, the loss will be smaller but we just assume regular market condition for second quarter. Of course, hopefully, the end result will be better than our forecast. So, it shouldn’t be too much different compared to Q2 or Q1 in terms of the new business operations.

Steven Pelayo – HSBC

Okay so that loss is still going to be at the kind of a pretty steady run-rate. Okay, all right. Thanks.

Operator

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

Roland Shu – Citigroup

I think the first question of my – is that you talked about 40 nanometer going to [stepping out] (ph) in end of this year. So, when are you going to (indiscernible) for this 40 nanometer? This is my first question, thank you.

Po-Wen Yen

Yes let me clarify it. What I just meant is our 40 nanometer FinFET technology will be available for customer kickoff by the end of this year. We expect the real product kickoff will happen in the next year, 2015.

Roland Shu – Citigroup

So that means (indiscernible) definitely will be much later next year, 2015?

Po-Wen Yen

Yes.

Roland Shu – Citigroup

Do you have the specific timeline on the (indiscernible) for 40 nanometer?

Po-Wen Yen

So far, we see a need to align with our customers. Again, this is a very dynamically driven situation. I cannot comment on that for the moment.

Roland Shu – Citigroup

My second question is for your China [fabless] (ph) or China investments, I know you’re investing in the (indiscernible) 8-inch capacity. How about your plan to invest in 12-inch capacity in China? Do you have any kind of plan in near term?

Po-Wen Yen

We certainly do not have any plans to invest 12-inch in China, and we will follow the Taiwan regulation. If there is any change in the regulation and also opportunity, of course we will look into that.

Roland Shu – Citigroup

But how about (indiscernible), what’s the capacity now and what’s the ultimate capacity going forward?

Po-Wen Yen

Right now, as I mentioned, it's expanding from previously 42k per month now to 46k, 47k per month. Ultimately, if they want to extend, they can go up to 60,000.

Roland Shu – Citigroup

So that still depends on demand, right?

Po-Wen Yen

Yes.

Roland Shu – Citigroup

And last question is for your utility cost, particularly the impact to the gross margin if power price increased by 30% going forward.

Po-Wen Yen

We don’t do that kind of hypothetical simulation. Basically from May 1, we will have some utility price kick in, and the total impact for profit margin is less than 1%.

Roland Shu – Citigroup

Less than 1%, right?

Po-Wen Yen

Yes.

Operator

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

Michael Chou – Deutsche Bank

One is to follow-up of 28 nanometer, when would you expect you can have (indiscernible) gross margin for 28 nanometer?

Po-Wen Yen

Michael, this is the formula which is (indiscernible) High-K Metal Gate versus Poly/ SiON, so it's very difficult to comment on that. We mentioned that by year-end this year, if our 28-nanometer is fully loaded, we will be able to breakeven at least for the operating level, but with corporate average earnings, it's also a moving target, it's very difficult to comment on that.

Michael Chou – Deutsche Bank

Okay is that fair to say to – is it easy for you to reach over 20% gross margin for your 28 nanometer in maybe 4 to 6 quarters, is that fair to say that?

Po-Wen Yen

There’s too many variables. I mean, potentially there is no reason why 28 nanometer can (technical difficulty).

Michael Chou – Deutsche Bank

Okay. The second question if for currency, what is your currency assumption for Q2 and what was your currency in Q1?

Po-Wen Yen

Q1, was 30.35 and Q2 forecast currently is around 30.25.

Operator

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

(Foreign Language)

Po-Wen Yen

28 nanometers, we see good returns and saw opportunity, it is difficult financially (indiscernible) aggressively (technical difficulty). We don’t really have to be limited by our annual potential, i.e. cash inflow versus our dividend. So we do have the resources to invest over the financial (technical difficulty).

Donald Lu – Goldman Sachs

(Foreign Language)

Po-Wen Yen

Again, that’s a $1 billion question, so no one really along the – (indiscernible). What we can do is really to continue to re-enhance our efficiency and debottleneck of our (indiscernible) facility. At the same time, given the rise in opportunity in the market, we’re putting more resources on our (inaudible) facility. I think that’s all we can do instead of predicting the up-end cycle for range to last for how long.

Operator

(Operator Instructions). The last question is from Szeho Ng, BNP. Go ahead, please.

Szeho Ng – BNP

After the conclusion of the IBM JV development, should we assume R&D back to the level of around something like 2 billion quarter level R&D and the expenses I mean?

Chi Tung Liu

We will see some mild drop at the end of this year and picking up next year. It also depends on how we’re going to ramp our 40-nanometer R&D project. So we will see a drop, but we don’t know how much yet.

Szeho Ng – BNP

So it shouldn’t be a sharp decline right?

Chi Tung Liu

It won't be a sharp decline.

Operator

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

Bowen Huang

Thank you everyone for joining us today. We appreciate your questions today. Thank you for your valuable time, and we will continue to work and to achieve more success on your behalf. And as always if you have any additional follow-up questions just feel free to contact UMC at ir@umc.com. Have a good day. Bye, bye.

Operator

Ladies and gentlemen, this concludes our conference for the first quarter of 2014. 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. Goodbye.

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