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Edited Transcript of 2303.TW earnings conference call or presentation 24-Apr-19 9:00am GMT

Q1 2019 United Microelectronics Corp Earnings Call

Hsinchu City Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of United Microelectronics Corp earnings conference call or presentation Wednesday, April 24, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jason S. Wang

United Microelectronics Corporation - Co-President & Director

* Michael Lin

United Microelectronics Corporation - Division Director of Finance

* Qi Dong Liu

United Microelectronics Corporation - CFO, VP, Company Secretary & Director

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Conference Call Participants

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* Aaron Jeng

Nomura Securities Co. Ltd., Research Division - Lead Sector Analyst for Greater China Semiconductor Research and Head of Taiwan Equity Research

* Albert Hung

JP Morgan Chase & Co, Research Division - Analyst

* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Randy Abrams

Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

* Roland Shu

Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research

* Sebastian Hou

CLSA Limited, Research Division - Research Analyst

* Szeho Ng

China Renaissance Securities (US) Inc., Research Division - MD

* Yi-Ling Liu

Arete Research Services LLP - Lead Analyst

* Zheng Lu

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome everyone to UMC's 2019 First Quarter Earnings Conference Call. (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, Investors, Events section.

And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

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Michael Lin, United Microelectronics Corporation - Division Director of Finance [2]

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Thank you, and welcome to the UMC's conference call for the first quarter of 2019. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial results, followed by our President's key message to address UMC's forecast and the second quarter 2019 guidance. Once our President 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 the Investors Financial section.

During this conference, we will make forward-looking statements based on the 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 company's control. For these risks, please refer to UMC's filings with the SEC in the U.S. and the ROC security authorities.

Now I would like to introduce UMC's CFO, Mr. Chitung Liu to discuss our first quarter 2019 financial results.

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [3]

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Thank you, Michael. I would like to go through the first quarter '19 investor conference presentation material, which can be downloaded from our website. Starting on Page 3, the first quarter of 2019, consolidated revenue was TWD 32.58 billion, with gross margin at 6.9%. The net income attributable to the stockholder of the parent was TWD 1.2 billion and the earnings per ordinary shares were TWD 0.10. And for capacity utilization rate was 83% in the first quarter compared to 88% in the previous quarter or 94% in the first quarter of 2018. And the revenue decline was mainly due to this lower utilization rate.

Page 4. Our sequential comparison 8.3% decline in revenue to TWD 32.5 billion is mainly due to this utilization rate decline I mentioned. Gross margin, as a result, dropped 50% to TWD 2.2 billion in the first quarter of '19 from TWD 4.6 billion in the previous quarter. However, we are helped by the reversal of the nonoperating income, mainly due to the stock market recovery.

Our nonoperating income in Q1 '19 was TWD 1.24 billion (sic) [TWD 1.25 billion] versus nearly TWD 2 billion loss in the previous quarter. So our net income attributable to stockholder of the parent in Q1 '19 is TWD 1.2 billion or equivalent EPS of TWD 0.10.

So on Page 5 is the year-over-year comparison. And revenue declined 13.1%, and gross margin decline rate was similar compared to the previous quarter, also around 50%. And the capacity utilization rate in the same quarter of 2018 was 94%.

Page 6 is our balance sheet. Our cash and cash equivalents continued to pile up given our more disciplined capital expenditure and stayed around TWD 88.7 billion right now. And our stockholder equity is around TWD 210 billion.

On Page 7, our ASP in Q1 is relatively stable. And on the next page, we see a major increase in our shares from Asia, and North America showed biggest decline around 6 percentage point in revenue breakdown.

Page 9. IDM represent 6% of the total revenue and in the previous quarter, it was around 8%.

Page 10. The communication rebound to 48% of the total revenue and the rest is relatively stable. And in terms of technology breakdown in Page 11, we see a steady 28-nanometer revenue contribution around 10%, and 14-nanometer because of the weakness in the cryptocurrency market still remain minimum, and we see some decline in 40-nanometer from 23% to 20% of the revenue breakdown.

On Page 12, we will see a mild capacity increase in quarter 2, mainly due to a lower base in Q1 due to shorter working days and annual maintenance. We will also see some slight capacity increase in both (inaudible) in China. And CapEx in 2019 remain around USD 1 billion, still unchanged. So the above is the summary of the UMC result for first quarter 2019. And more details are available in the report, which has been posted on our website.

I will now turn the call over to our President, Mr. Wang.

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [4]

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Thank you, Chitung. Good evening, everyone. Here, I would like to update the first quarter operating results of UMC. In the first quarter, foundry revenue declined 8.3% quarter-over-quarter to TWD 32.56 billion, leading to a foundry operating loss of 4.6%. Utilization rate was 83%, bringing wafer shipment to 1.61 million, 8-inch equivalent wafers. Although overall wafer demand declined during the first quarter, we observed stable wafer shipments from the wireless communications segment, solidified it by smartphone-related components, such as display, RF, application processor and baseband modem. We continue to build on our promise to building the shareholder value, and in Q1, our Board of Directors proposed to distribute a cash dividend of approximately TWD 0.58 per share, subject to shareholder approval during the annual shareholder meeting.

Entering the second quarter of 2019, UMC will sustain its energy and its continuing transformation, which will allow us to best take advantage of improving wafer demand within wired and wireless communication segments, with smartphones, networking and display-related products continually seeing better-than-expected conditions. Going forward, our strategy to stay focused on developing existing logic and specialty solutions across numerous technology platforms will help us enhance our market relevance to secure future business and expand our presence in the IC industry. We are confident that by continuing to buy responsibly and execute our technology development, capacity expansion and manufacturing excellence, we can bring optimal value to the company, its shareholders and employees.

Now let's move onto the second quarter 2019 guidance. Our wafer shipment will show an increase of 6% to 7%. ASP in US dollars is expected to increase by 3%. Gross profit margin will be in the low teens percentage range and capacity utilization rate will be in the mid-80 percentage range. For foundry CapEx budget of 2019, it will be USD 1 billion.

That concludes my comments. Thank you all for your attention. Now we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is coming from Randy Abrams of Crédit Suisse.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [2]

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I wanted to ask the first question. If you could provide an update on some of the upcoming milestones for developments just relating to, I guess, 3 things: the Fujitsu Mie, the closure of that facility, also a progress on the China listing, and any milestones upcoming on the Micron Jinhua case?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [3]

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I think for the Fujitsu Mie fab, we already received the Taiwan-related approval and we are waiting for other government approval. We are still in the process and we still have about 6 months left in this purchase agreement. So we still have some time waiting for the approval to come. And for the time being, it's not up to us to predict when we can receive the relevant approval. And as for China listing for -- again, including UMC, we have submitted the applications to this Science and Technology Innovation Board for Shanghai Stock Exchange in March -- mid-March and now it's being reviewed -- assessed, and also reviewed by the authority. Again this is purely up to the authority to determine the progress and schedule for the listing. And as for the legal case with Jinhua and also U.S. Department of Justice, there is no any development since our call last time or our formal press release last time. So no further development yet.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [4]

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Okay. And maybe just one follow-up on the -- for the Fujitsu case with the 6 months left in the purchase, is that a 6 months, if it's not approved, the deal? Or what is -- is that, that the deal is called off in 6 months? And I guess, for the original planned closure, has there been -- is it more just regulatory certain things delaying closure? I guess, you're confidence in the closure and then maybe what happens in 6 months?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [5]

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We still have 6 months to close the deal according to the existing purchase agreement. And of course, it seems for outside of the current purchase agreement, everything need to be renegotiated.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [6]

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Okay. The second question I wanted to ask just on the guidance. It's, I guess, 2 parts. One for the ASP on the few percent increase. Normally, first quarter, there is a bit of annual price reset, so I was curious just pricing environment into this year, whether that's normal or anything abnormal with the pricing going into this year? And then from a mix factor, it looks like mix of advanced coming back. So if you could talk about the 28 and 40, how much is factored in? Or what applications might be driving that, if that's the other factor?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [7]

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Well, the ASP increase in the Q2 guidance refers to basic product mix in the 12-inch. While we think the loading across the 8-inch and 12-inch overall company will be somewhere in the mid-80s percentage, and that's probably similar loading estimate for both 8- and 12-inch at this point, so we definitely see some increase around the 12-inch, so that help on the ASP mix. Right now we don't have for the breakdown of the each technology nodes, we see pretty -- we see some increase on the 28, and we see some increase on the 40, and while the 65 remains flat. So obviously, from the mix standpoint, the more advance as they improve a little, but it slightly increased. The -- while 8-inch dropping to 85% and in general, the 80% and 90% -- 80- and 90-nanometers is fully loaded at this point, yes.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [8]

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Okay. I'm curious maybe just the last question I want to follow-up on the 8-inch drop to 85% because I think you're full even later into the slow down. So maybe the factors like on slowdown, what you're seeing there? And how you see the rest of the year if you expect the utilization to tighten up? And maybe the other part of the question, in the prepared remarks you mentioned about smartphone, networking, display better. If you can talk a bit more on the improvement, is that a function of what you're seeing in terms of inventory levels, just customer activity with less fear of trade war? Or kind of if you think most of this is just the seasonality kicking in, but maybe, if you can talk a little more about the pickup in activity you're seeing from customers.

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [9]

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Sure. Before the 8-inch specific, the overall inventory situation we observe, we see the inventory situation has improved, but with sound segments, okay, that is doing better than the others. The recovery we have observed is more in the mobile communication and computing space segment. However, the automotive and consumer may take a longer time to recover, and we are observing some of the inventory situation improved. Now if that reflects our 8-inch as well, so we are seeing the mobile space growing, increase in the 8-inch, while with the -- the inventory correction on consumer in automotive segment continue. Okay. But we do believe that Q2 '19 will be the straw of the 8-inch loading and 8-inch loading will start to improve and recover in the second half of '19.

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Operator [10]

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And the next question is coming from Szeho Ng of China Renaissance.

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Szeho Ng, China Renaissance Securities (US) Inc., Research Division - MD [11]

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Two questions from my side. First one regarding the net other operating income. How should we model that one going forward because it has been quite volatile every quarter?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [12]

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For the first quarter, rebound in the net operating income is mainly due to the recovery in the stock price as you understand that UMC has plenty of holdings, especially in the Taiwan Stock Market, and we took a bit in Q4 of last year because of the downturn and now we also recovered about TWD 1.2 billion also in the first quarter of this year due to the same reason. And interest expenses, every quarter is around TWD 500 million, and we also have about TWD 500 million ForEx gains in the first quarter due to the strengthened renminbi versus US dollars, given our U.S. dollar syndicated loans for our China operation. So it's a bit volatile or unpredictable to really budget for second quarter, given the factor involves some markets as well as the currencies, so the major 3 components as I just explained, and maybe you have much better clear view on that than ourselves.

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Szeho Ng, China Renaissance Securities (US) Inc., Research Division - MD [13]

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Okay. All right. And second one on the dividend payout ratio. Given the strong cash generation and also the cash on hand, is it fair to assume over 100% payout ratio is possible in future?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [14]

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Well, it's not impossible, however, I think we have been trying to give consistent expectations from our shareholders in terms of dividend payout. And last year, our Board has approved our proposal to payout 100%, which is subject to the shareholders meeting approval. And at the same time today, during our Board meeting, we have approved another round of share buyback, which is around 1.6% of the outstanding shares. So from a total [combination] or total shareholder returns perspective, UMC will continue to utilize the strength in our free cash flow and also the cash on hand. We will certainly consider every angle in order to provide total package.

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Operator [15]

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(Operator Instructions) And next we'll have Roland Shu of Citi.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [16]

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So your channel said that in the last year, we recognized a loss of about TWD 7.2 billion. I just want to understand was the loss mainly due to not economic scale or due to low utilization or other reasons? Then for this fab, what is the capacity for Xiamen fab to reach an economy scale? And how much CapEx you need to continue invest to reach this economy scale?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [17]

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Xiamen, we own currently a little over 50%. So the number you quote UMC only need to recognize about 2/3 of that. And current capacity is 17,000 wafer per month and near-term target is to ramp to 25,000 wafer per month, which the level we think should be also considered as a level for economic scales. And the additional CapEx will be relatively lower if you compare to the per 1,000 CapEx for the first 17,000 we already built. Due to that we don't really need to buy every equipment from scratch. So in terms of number, we haven't really finalized the product mix compensation yet, so there is really no final figures in terms of the CapEx to take shipments up to 25,000. However, our CapEx this year, the $1 billion budget, about 75% is 12-inch related, and 25% is 8-inch related. Among the USD 750 million, I will say more than 60%, 70% is Xiamen related.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [18]

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Okay. And then, Chitung, you said, you are trying to expand to 25,000 wafers per month. So do you have a time line for this 25,000 wafer per month capacity?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [19]

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It's a moving progress. It's up to the customer demand, and as I mentioned, we haven't even finalized the technology composition for the additional 8,000 wafer capacity, so it will take at least multiple quarters.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [20]

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Yes, so before we reach this 25,000 wafer per month, even we load at a 100% utilization for existing capacity, will it be possible for this fab to be breakeven or to be profitable?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [21]

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Still it's going to be difficult, but the loss certainly will be significantly reduced that's for sure.

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Yi-Ling Liu, Arete Research Services LLP - Lead Analyst [22]

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Okay. My second question is for first quarter, even you are -- you load at 83% utilization, but first quarter was operating days were loss making, so it looks like your breakeven utilization now seem to be near or higher than 90%. I think this is higher than 2018 or 2017 level, so was it due to the product mix change or the low ASP? And how will this breakeven utilization look in second half this year?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [23]

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That's not totally correct. If you're using our quarter 2 guidance, our 80 -- mid 80% range capacity utilization will actually lead us to have around low teens in gross margin, which also suggests at least a breakeven in terms of operating profit. So I will say, more like a mid-80 range rather than anything close to 90% in terms of break-even point.

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Yi-Ling Liu, Arete Research Services LLP - Lead Analyst [24]

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Okay. So this mid-80 percentage point breakeven utilization will be well-maintained in second half or going forward? Or this will be further improved?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [25]

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I think our President definitely has a more aggressive target, but I think we'll certainly continue to be more optimized. Anything Jason want to comment?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [26]

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Definitely not satisfied with the current breakeven point, and we have been progressively driving this breakeven reduction in the past quarters. And so it came down, and we came down to -- at Q2 at around mid-80s and we're going to continue driving that, and to even better, and significantly better than that. So that will be our goal. We are not satisfied with the mid-80s number.

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [27]

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Okay. This is blended with Xiamen operation. So the Xiamen situation was really a brand-new 28-inch centric new fabs running at pretty low monthly capacity. So if you take out the Xiamen impact, the UMC in Taiwan or UMC cover the Xiamen operation, the break-even point will be much, much lower.

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Operator [28]

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And the next one is from Bruce Lu of Goldman Sachs.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [29]

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So my question is that since management changed the operation and business strategy, for the past 4, 6 quarter, we do not really see the R&D expenses coming down. So basically, we were having some expectations, but obviously management definitely want to keep certain R&D expenses. So when can we expect to see these R&D expenses to contribute in terms of top line or the profitability?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [30]

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Well, I mean, our strategy is to focus on the technology. R&D standpoint, our strategy is to focus on the 40-nanometer and larger geometry technology as we stated when we started late 2017. And within those larger technology, we want to become additive in relevance into a specialty area, so that means we will continue to invest in the R&D. The major focus on spending is the disciplined CapEx spending. So we have a dramatic reduce in our CapEx spending, and while we continue to focus on the R&D spending, so we're going to make sure that we have a strategy trend that is sustainable and competitive going into next phase. So that's why you haven't see really us emphasize on the cost reduction on the R&D spend yet. But once we are more -- once we start covering more diversified specialty technology, we will continue revisit that spending area. And -- but at this point, it will remain our R&D spending level, yes.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [31]

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What is the main expense for R&D? I mean within the R&D expense, how much is for the R&D staff? How much is for equipment or what's the breakdown?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [32]

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It's changing every quarter. Of course, you can imagine the percentage of equipment-related depreciation, for example, will continue to decline quarter-over-quarter. But specialty related project, according to our President, is likely to continue. At the same time, we are still working on this 32-nanometer technology development. So for the time being...

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

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Can you give us some -- what kind of depreciation as a percentage of R&D in 2018?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [34]

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In 2018, R&D depreciation, I would say, around 20%, 25%.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [35]

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So the bug is still the salary for the R&D staff?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [36]

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Yes.

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Unidentified Analyst, [37]

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I see. Okay. So my next question is more for Chitung. So assuming that we got like what Jason said, in place, what kind of [impact in terms of] depreciation or CapEx for our numbers?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [38]

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It won't add up too much, it's less than 40,000 wafers per month set and it's fully equipped by our view and that's the reason we want to purchase this fab, so it's unlikely to spend a lot of money for new CapEx and the result of the purchasing price is around USD 600 million, and UMC already own 15%, so it's not going to increase our depreciation too much. So speaking of that, our depreciation expenses in 2019 is likely to decline by a little bit more than 5% compared to 2018.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [39]

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How about 2020?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [40]

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I think the trend will go down -- will trend down, and I think the magnitude of decline could be even bigger in 2021. So I don't really have detailed numbers, but the trend is likely to trend down by few percentage point per annum.

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Operator [41]

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(Operator Instructions) And the next question is coming Aaron Jeng of Nomura Securities.

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Aaron Jeng, Nomura Securities Co. Ltd., Research Division - Lead Sector Analyst for Greater China Semiconductor Research and Head of Taiwan Equity Research [42]

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Just out of curiosity, in the last 2 quarters, you reported not so good 12-inch fab UTR, but your 8-inch wafer fab UTR was almost fully loaded particularly 4Q last year, and I think, in 1Q, it was also nearly full. But into second quarter, you start seeing 12-inch fab orders improved, but on the other hand your 8-inch fab UTR comes down sharply to mid-80% from like nearly full last quarter. So I just wonder where the discrepancy comes from? Whether it's just like an effect? Or is there any structural issue from the observation on this 12-inch and 8-inch direction difference?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [43]

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The decline in the 8-inch business is mainly due to, as I mentioned earlier, the -- with the inventory correction continue in the consumer automotive segment. And the second to that is the -- we have lower demand within the regional market on our selected growth applications. In the past, we continue to improve our product mix, but unfortunately on those growth applications that we selected are showing some of the weaker demand in 2019. And along with the inventory correction and we're experiencing some decline in the second quarter '19. We don't think that any fundamental changes and we remain positive for our long-term 8-inch business outlook. And since we are penetrating into the area that we selected within our addressable market, and once those segment recovered, we think we will benefit from that. So that's on the 8-inch side. The 12-inch, it's the -- while we also diversified ourselves to a specialty market segment, we start seeing some of the recovery as well on the mobile space. And we mentioned about display, we mentioned the RF and we'll continue seeing that. And so that helps -- that helped with our -- the 12-inch loading situation. And meanwhile, the lighter loaded node like 28, and given the technology of a 28 High-K is getting a maturity in the market, the 22 now finally released, and we start seeing some of the positives on that as well. The result of our 28-nanometer table activity, we see numbers on table increase year-over-year. So that's why we also certainly hope that those table will reflect in volume run in the later time. So we also remain positive with our 12-inch loading situation going forward.

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Aaron Jeng, Nomura Securities Co. Ltd., Research Division - Lead Sector Analyst for Greater China Semiconductor Research and Head of Taiwan Equity Research [44]

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Just a quick follow-up. You said at 8-inch, a few growth segments that you identified are slower this year. Could you remind us which are those growth segments that you defined at 8-inch?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [45]

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For example, the MCU space and PMIC area, those area are showing a much weaker demand in 2019. Those are what we have selected in the last year. The automotive is also a segment that we have selected and obviously, automotive we see a very slow recovery following inventory correction at this point. So those are the areas that we have selected.

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Aaron Jeng, Nomura Securities Co. Ltd., Research Division - Lead Sector Analyst for Greater China Semiconductor Research and Head of Taiwan Equity Research [46]

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Okay. And for this area, are you seeing -- actually, earlier you mentioned, but I'm not sure whether the trend into the second half on 8-inch will be coming from these growth segments. So when you said in the second half, you are going to see the recovery at 8-inch, is it going to be driven by these few growth segment or still by more unlike mobile segment?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [47]

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Still on the mobile segment right now. We said the consumer automotive segment will probably last a little bit longer. At this point, it's probably not a Q2 '19, and probably will be beyond that. The rebound is coming more from the below space, yes.

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Aaron Jeng, Nomura Securities Co. Ltd., Research Division - Lead Sector Analyst for Greater China Semiconductor Research and Head of Taiwan Equity Research [48]

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Yes. Okay. And I have some more follow-up. Consumer has remained wide at occasion, so when you say consumer could you possibly specify, which occasions behind like TV or [set-top box] or something else, like goods or...

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [49]

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I don't want to get into too specific. It may be related to the customer specific, so -- but if I look at the Q2, the -- in a consumer space the TV set-top box and smartcard are the stronger area. And others, there are some areas that are weaker than that, yes.

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Operator [50]

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(Operator Instructions) And the next question is coming from Charlie Chan from Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [51]

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So first of all, your HeJian IPO, you've said end of it really get listed, do you need to carve out the China operation from accounting perspective?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [52]

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No. It's fully consolidated right now, and it will continue to be a fully consolidated entity regardless it's listed or not. UMC will continue to hold at least 87% of the listing entity.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [53]

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Okay. And would you explain [any gain] or expense from the Easter IPO?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [54]

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We are not selling all shares. So they will raise new money, new capital. Our holding will be diluted, as I mentioned. That's the trend, but the UMC, for the first listing, if it got approved, will not receive the money, capital.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [55]

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Okay. And other question is regarding your second quarter guidance. So you seem to imply like a mid-80% utilization is operating at break-even point, so does that mean the second quarter OP margin is about breakeven, you said that right calculation?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [56]

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No, it should be slightly better than breakeven. Yes.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [57]

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Okay. And also, yes, maybe this question is to Jason. About your comments regarding the main improvement in computing segment. I know it's not easy to be very specific, but can you give us an example, what do you mean by computing because from what I can really think of it should be graphic, maybe PC, networking chip or -- yes, anything you see a improvement in computing?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [58]

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The -- what I mentioned is the mobile communication that is recovering. For the computer segment, we see it remained flat. The computer is actually flat, while the mobile computer actually rebounds as strongest, yes.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [59]

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Okay. And lastly, on your gross margin trend. I know the company want to kind of lower your breakeven points, but what do you think about the price competition? It seems like industry is consolidating, but China peers continue to expand the capacity. So over the past 6 months and the coming 6 months, what do you think about the competition environment? And also it will be much appreciated if you can talk about your negotiation with those raw wafer vendors because last quarter, you seem to have mentioned you want to renegotiate. So we are wondering about the outcome of this negotiation?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [60]

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Yes, sure. Well, the pricing -- the market prices -- competition is always intense. So the goal is for us to stay competitive and one direction is the -- from our breakeven point, we want to continue trend down from a cost side. And on the other side, from an ASP management, by developing -- continued developing of solutions across the multiple technology nodes and address the specialty. And then, we believe with those specialty technology solution to our customers will improve our product mix. And then not only helping us with the overall loading the utilization rate as well as our pricing position, so we have to try both. They both cost side as well as the product mix improvement side. And the -- just stay competitive. As far as the raw material, the negotiations and although we already have a long-term contract agreement with the raw wafer supplier, we always continue negotiation with the supplier to achieve a better cost saving, so that, it just had to be a ongoing activity.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [61]

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So first of all, you said that contract price for this year can be lowered. This is first follow-up. And second follow-up, not being -- not trying to be cynical, right, but you mentioned about improving the product mix, but I guess, your foundry peers all want to do the same strategy, right? So how can you do better than your internal peers by this kind of product mix improvement strategy? So can you answer these 2 follow-ups?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [62]

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Yes. Stay competitive means in the foundry space, it has to come from the fundamental technology solution readiness, right? So while we continue to invest in R&D and we believe, we have -- we will demonstrate some advantage in that space, and so that will help, okay. And from the wafer -- from the raw material, we see a sensible improvement right now and despite that we only have a long-term contract in place, but on that front it's -- we just have to continue doing that, yes.

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Operator [63]

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The next question is coming from Bruce Lu of Goldman Sachs.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [64]

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Okay. The question is for 28-nanometer, which I believe is the biggest earning track for UMC and I was so impressed to see management stating that you have a decent recovery for design win status for 28. Can you tell us a bit more in terms of what kind of occasion for your new design win in 28? And when can we expect 28-nanometer simulation that can be recovered to industry level or the gross margin for 28-nanometer can be achieved to that (inaudible)

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [65]

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Well, for the 28-nanometer applications mainly coming off second wave application, WiFi, digital TV, set-top box, and -- but not only on the logic, it also in a specialty technology like high-voltage areas, so -- and we stock it into those space aggressively, and we hope that we will see some through after both products are ramping, yes.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [66]

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Can you give the time line in terms of the recovery?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [67]

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Again?

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [68]

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Can you give us some time line in terms of the recovery?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [69]

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Well, I mean, if we break it down by the 28 and as well as the 22, for the 28 -- currently, the 22 we're probably expecting the first product phasing out second half '19. So the volume production will be in sometime in 2020 and for the current 28, we will see a quarter-over-quarter growth at least till second quarter of '18 -- 2019, right.

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Zheng Lu, Goldman Sachs Group Inc., Research Division - Research Analyst [70]

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So when can we expect 28 profitability will reach the corporate average?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [71]

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Well, we don't know the corporate average for a few quarters from now, but in terms of capacity utilization rate, as Jason mentioned, it is more possible to predict, so we do expect the corporate average utilization rate for 28 can be achieved sometime in 2020.

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Operator [72]

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The next one is from Albert Hung of JP Morgan.

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Albert Hung, JP Morgan Chase & Co, Research Division - Analyst [73]

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I'm asking question on Gokul's behalf. My first question is what's our full year growth expectation for semi industry and UMC?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [74]

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2019 or...

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Albert Hung, JP Morgan Chase & Co, Research Division - Analyst [75]

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Yes, 2019.

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [76]

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Yes, all right. Well, I mean, the -- well, from a industry standpoint, I think the market is flat. But from the focusing on our addressable market and technology, which is now 7-nanometers. While we'll continue to improve our business in second quarter and we believe, the -- we will be likely to stay in line with the industry, yes.

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Albert Hung, JP Morgan Chase & Co, Research Division - Analyst [77]

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Understood. And my second question is about the depreciation trend, late year and next year. And when will 28-nanometer depreciation start to come down meaningfully?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [78]

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The whole UMC depreciation curve is trending down starting from 1 year or 2 ago. And 2019 overall depreciation will be down by a little bit more than 5% compared to 2018, and the trend will continue in '19 -- 2020 and 2021. I think the decline mainly due could be bigger in 2021 versus '20. I think that's the more notable decline in depreciation for the recent years.

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Albert Hung, JP Morgan Chase & Co, Research Division - Analyst [79]

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Any color on 28-nanometer depreciation?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [80]

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Well, that's mainly 28 related as our depreciation year is 6 years and we had major spending about 3, 4 years ago. So a bulk of 28 will be finished depreciation in 2021.

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Albert Hung, JP Morgan Chase & Co, Research Division - Analyst [81]

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Understood. And my last question is on, did you see any benefit from exits of your competitors, especially like Global Foundries selling fabs?

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [82]

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We cannot comment on our competitors and we have a very clear corporate strategy by focusing on non-7-nanometer market and also diversifying to specialties technologies. And we think we have strong resources and also talent to execute our strategy. So we saw without our competitor where we will not be impacted in terms of executing our current strategy.

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Operator [83]

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The next question is coming from Sebastian Hou from CLSA.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [84]

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My first question is on the 8-inch wafer price -- foundry wafer price. Given that the utilization rate is no longer 100%, and also some tailwind on the raw material side. Do you expect the more pricing pressure this year on the 8-inch foundry pricing?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [85]

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Yes, I think so. Yes, I think so. The -- well, when the market's -- the demand's weaker and obviously, putting some pricing pressure to it. So we're definitely seeing that. But I think in the longer-term, I mean, the 8-inch, the outlook still remain positive. So I think this is more of a 2019 situation and after that we'll just have to continue improve our product mix and continue migrating our technologies. And so -- but for 2019, I do see that as a challenge, yes.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [86]

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Okay. And regarding the -- second question is regarding the second half recovery particularly on the 8-inch side, what would be the major applications that you project right now that could drive that rebound?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [87]

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Well, I mean, the -- at this point, it's mainly in the mobile communication space. While we're still seeing the automotive will probably have a later recovery maybe towards -- hopefully towards the end of the '19. But right now, I think the more obvious one is the mobile communication area.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [88]

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Okay. So the mobile is doing well in the second quarter and now, you expect that these trends will likely continue into second half?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [89]

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Yes, we do. And...

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [90]

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Okay. And as for the inventory problem that you see in consumer in auto, probably not rebound so strongly second half, but perhaps toward the end of this year?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [91]

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Right. I think the -- in our view, the auto is probably the weaker, weakest. It's weaker than the consumer. We hope consumer will probably rebound earlier than auto, yes.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [92]

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Okay. Okay. Got it. And is it -- sorry, if we take all these factors into consideration, with the rebound trend likely to get the 8-inch UTR back to close to fully utilized, as we have seen in past few quarters?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [93]

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Well, we will see gradually improve, and we still kind of far to give you an actual projection, but we think that Q2 is the bottom, yes.

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Operator [94]

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Ladies and gentlemen, we are running out of time so we're taking the last question. And the last one is coming from (inaudible) of UBS.

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Unidentified Analyst, [95]

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What is the approximate raw wafer cost for you now? And are you concerned with the current inventory level of raw wafers? And also is it likely to see raw wafer price trend lower this year? That's my first question.

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Qi Dong Liu, United Microelectronics Corporation - CFO, VP, Company Secretary & Director [96]

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It varies, it depends on 8-inch or 12-inch or any specialty wafer recipe we use. So normally with depreciation as a bulk for high leading-edge node, percentage of raw wafer will tend to be smaller. Or for 8-inch, the depreciation component is very small. So the percentage of raw wafer will be more important. So it really depends. But we are not concerned about the supplier of raw wafers, as we have secured good, steady long-term supply. And previously, there is another analyst asking about the pricing. I guess, that's the key variables. So supply shouldn't be an issue, but we will continue to work on getting better deals out of the wafer suppliers.

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Unidentified Analyst, [97]

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So which means you will continue to renegotiate with them on the future raw wafer prices?

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [98]

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Yes. We are continuing doing that. While 1 year ago, we're still struggling with securing supply assurance on the raw wafer -- or raw material, and the pricing wasn't much of a room for negotiation. And now once we secured the long-term contract and our focus for the raw material now is at a pricing negotiation, yes, and we continue doing that.

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Unidentified Analyst, [99]

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Understood. And also, Jason, I think you mentioned a little bit about the full year outlook, but it wasn't very clear. Could you give us a better view on the full year outlook percentage.

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Jason S. Wang, United Microelectronics Corporation - Co-President & Director [100]

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Well, I mean my previous answer was saying, focus on all addressable market technology. We will stay in line with the industry in terms of whole year outlook. And right now there is a different way to look at it with the space that we now address and or exclude out, but our focus is in a space that we can serve and in that space we will be in line with the industry.

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Operator [101]

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We thank you for all your questions. That concludes today's Q&A session. I will turn things over to UMC Head of IR for closing remarks.

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Michael Lin, United Microelectronics Corporation - Division Director of Finance [102]

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Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir.umc.com. Have a good day. Thank you.

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Operator [103]

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Thank you. And ladies and gentlemen, that concludes our conference for first quarter 2019. Thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com onto the Investors, Events section. You may now disconnect. Goodbye.