聯華電子 (UMC) 2012 Q2 法說會逐字稿

Welcome, everyone, to UMC's 2012 quarter-two earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the presentation there will be a question and answer session.

Please follow instructions given at that time if you would like to ask a question.

For your information this conference call is now being broadcasted live over the Internet.

Webcast replay will be available within an hour after the conference is finished.

Please visit our website at www.umc.com under the Investor Relations, Investor Events section.

I would now like to introduce Mr. Bowen Huang, Head of Investor Relations at UMC.

Mr. Huang, you may begin.

Thank you and welcome to UMC's conference call for the second quarter of 2012.

With me today is the CEO of UMC, Dr. Shih-Wei Sun and the CFO, Mr. Chitung Liu.

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 risks that may be beyond the Company's control.

For these risks please refer to UMC's filing with the SEC in the US and [the overseas] securities authorities.

I would now like to introduce UMC's CFO, Mr. Chitung Liu to explain UMC's second-quarter 2012 business results.

Thank you, Bowen.

For the second quarter of 2012 revenue was TWD27.62b, a 15.2% quarter-over-quarter increase from TWD27.77b (sic - see presentation "TWD23.77") in Q1 2012 and a 1.9% year-over-year decrease from TWD28.15b in 2Q 2011.

Gross margin was 24.4%.

Operating margin was 11.5%.

Net income was TWD2.99b.

And earnings per ordinary share were TWD0.24.

The above is a short summary of UMC's results for 2Q 2012.

More details are available in the report which has been posted on our website.

I will now turn the call over to Dr. Sun.

Thanks, Chitung.

Good morning, good afternoon and good evening, ladies and gentlemen.

In Q2 2012 UMC's results exceeded our expectations.

Wafer shipments grew 18.6% quarter over quarter, to reach 1.14m 8-inch equivalent Wafers, bringing overall capacity utilization to 84%.

Strength from the communication and the consumer sectors mainly contributed to the increased shipments.

For the upcoming quarter we expect milder revenue growth, with 40-nanometer percentage contribution increasing significantly as the volume production begins for several new products.

40 nanometer, 28 nanometer, 20 nanometer, FinFET 3D transistor technology and the ground-breaking for our Fab 12A, Phase 5 and Phase 6 in Tainan, Taiwan will solidify UMC's leading-edge technology and the capacity foundation to further advance UMC into the next round of growth.

Obtaining IBM's 20-nanometer process design kit and FinFET technology will expedite the development of our internal technologies, enabling customers to realize the next generation of low power consumption chips for mobile communication and computing applications.

With a complete portfolio of the 28-nanometer and the 20-nanometer process technologies, Fab 12A Phase 5 and Phase 6 readiness is timed to provide sufficient advanced capacity to propel UMC and its customers into a new growth phase.

These efforts to secure industry forefront technology and adequate capacity demonstrate UMC's leadership under our customer-driven foundry solutions approach and have been overwhelmingly well received from our customers and partners.

UMC's advanced technology business is entering another growth cycle.

Through our upcoming efforts to enhance mass-production technology, capacity expansion and customer service we anticipate leading-edge revenue contribution to increase substantially during the second half of this year.

However, we are cautious due to the potential for chip demand volatility in the near future, as end-demand uncertainties elevate in light of growing European sovereign debt issues, supply chain inventory and the customers adopting a conservative stance.

We are watching the situation closely, so we may respond accordingly to any status change, while at the same time developing leading-edge and specialty technologies, thus, strengthening UMC's solid foundation to ensure stable and long-term growth.

Now let me provide you with the guidance for the third quarter of 2012.

Wafer shipment will increase marginally.

Wafer ASP in US dollars will increase marginally as well.

Gross margin will be in the mid 20% range.

Capacity utilization will remain flat from previous quarter.

The computer and the consumer segments will outpace the communications segment.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thanks.

(Operator Instructions).

Your first question comes from the line of Mehdi Hosseini of Susquehanna International.

Yes, thank you, it's Mehdi Hosseini, Susquehanna International.

Can you please provide me an update with your process technology migration, when would you start trial production for high-k metal gate and when would that turn into volume ramp?

And I have a follow on.

Okay.

For 28 nanometer UMC offers two process options, one is the poly-SiON, one is the high-k metal gate.

If you're asking high-k metal gate, we are having our first real high-k metal gate product tape out this summer.

So we are in the pilot production phase in the second half of this year.

And UMC is one of the few foundries offering the gate-last high-k metal gate technology.

Yes.

And then on poly-SiON, or low-power 28 nanometer, can you give me a sense where the yields are and also how aggressively you're ramping capacity?

For 28-nanometer poly-SiON we are still working very hard, especially on the parametric matching and the [software] improvement.

But we are still targeting to reach 5% of our revenue from 28-nanometer poly-SiON by the end of this year, 2012.

Okay, great.

And then just a question on the big picture.

Your main competitor last week talked about concern on channel inventory building up that would have an adverse impact on Fab loading and Wafer shipment in Q4, Q1.

And I know there's a lack of visibility, but maybe you can provide us a qualitative assessment how you see the channel inventory and how it would impact the Fab loading beyond Q3.

Yes.

During last quarter's conference call we said the Q1 inventory reached the bottom.

However, in Q2 and now Q3 the inventory does go up, so we may see the inventory cycle.

But, overall speaking, this year's pattern is somewhat similar to last year.

During summer time we see some deterioration, then the second half may be weaker and you can also see that the inventory cycle is much shorter now.

Yes.

From the system OEM, to fabless, to IDM, the inventory all go up to some extent.

As far as the global demand and the macro situation, it's very unpredictable.

European sovereign debt is a continuing.

The emerging markets are slowing down.

US is mixed; the retail is going down.

The unemployment is still high and -- but the housing seems to be making some recovery.

On the other hand, there are lots of new products to be released in Q4.

Right, right.

So I think buyers psychologically are holding out to wait for the new products.

So it's very uncertain and unstable and it's difficult to project.

We will give you the guidance for next quarter Q4, yes, next time.

Sure.

Just very quickly as a follow up, would it be fair to say that if there is this uptake in inventory it is more communication related, wireless communication, because of -- in advance of new product introduction, or is that across the board?

I think it's in general, yes.

It's in general, yes.

Okay, thank you.

Yes, thank you.

Your next question comes from the line of Szeho Ng of BNP.

Good day, gentlemen.

One question on my side.

You spent roughly $900m on CapEx in first half this year, but the capacity really hasn't changed much for the last three to four quarters.

How should we comprehend that?

Yes.

For our CapEx there is a significant portion, I think over 20% is for capacity conversion from the legacy nodes.

Also I think in our Q4 we have more significant capacity release.

And also these CapEx will be carried over, there is a one-quarter lag, so some portion of that capacity release will happen in Q1 next year.

I see.

Is it possible to talk about the installed 28-nano capacity, let's say, by the end of the year?

I cannot give you the exact number; it's a little sensitive right now.

Okay, all right.

Okay.

Sorry.

Okay, no problem.

That's okay.

Thanks very much.

Thank you.

Your next question comes from the line of Richard Clode of Pioneer.

Hi, thanks for taking the question.

Just to follow up on, I think, what people have been talking about before, for the second half and this inventory correction could you give us a bit more color as to how customers have reacted to what's been happening in terms of macro?

So how the order book changed for Q3, resulting in the guidance you're now giving, because obviously before I think it was looking much stronger.

And then you do have a slightly different customer base to TSMC and, so, perhaps they're seeing a slightly different cycle to you and perhaps would -- had a stronger Q3 and then seeing more of a correction into Q4.

How would you see your customers and how that inventory correction progresses in the second half?

Yes, every customer is managing their inventory level differently.

And psychologically every segment is slightly different.

But let me try to give you our Q3 strengths and weakness.

For our Q3 in several areas for UMC they are quite -- our customer are stronger.

For example, WiFi, set-top box, DTV, GPS and also in the domain of hard disk drive, re-channel, touch controller, these areas in Q3 are stronger.

And we also guided communication, relatively to Q2, is relatively weaker, such as base-band and the small panel driver ICs.

I guess these are the general things.

Also the PC periphery is relatively weaker, yes.

But if we look at the deterioration we've seen and the outlook for Q3, where did that come from primarily?

The weakness, as I mentioned, for example, in the communication domain --

Versus, say, where we were.

If we rolled back three months and you looked at your order book for Q3, and then you look at your order book now, where's the change come from, rather than which is stronger and weaker in the quarter?

Where has the change, the delta, come from?

I think that most of the delta are coming from in general the 8-inch legacy and the 12-inch legacy technology nodes.

The rest of the nodes are pretty strong for us in general.

And would you --

(Multiple speakers) 12-inch legacy.

And would you say your customers react maybe a bit faster than the competitors and, so, their commentary about being more of an inventory correction from Q4?

Would you say that you're seeing more of an inventory correction maybe from Q3?

Q3?

I think it's a continuous -- sorry, I didn't get your question exactly.

Could you try again?

Given you have a slightly different exposure in terms of customer, do you think that you're seeing the inventory correction earlier than your competitor, who is obviously seeing a stronger Q3 than you are, but then talking about a much weaker Q4?

Do you think that you'll see perhaps a weaker Q3, but then not such a drop off into Q4?

I don't have that visibility with our competitor.

And we didn't -- we are not giving any guidance on Q4 either.

So let's try the next quarter.

Richard Clode Okay, sorry.

All right, thank you.

Yes, thanks.

Your next question comes from the line of Steven Pelayo.

Hi, yes, a couple of quick questions here.

As you ramp 40 nanometer here to 15% of revenues exiting the year, I'm curious about margin implications.

It does seem like your capacity isn't growing very rapidly, so you're getting a pretty high re-use rate, I guess, so I think that would have a favorable impact.

But could you help me understand where 40-nanometer margins are today, where you think they'd be exiting the year and how that could help your overall margins?

I think 40-nanometer margin is on track, I think, to our expectation.

I guess you're asking the comparison between 40 and the older generation, or (multiple speakers).

I'm trying to understand is 40 nanometer a drag for you today, but will likely be better than corporate average, let's just say, by the end of the year.

Are you on track for that type of thing, where 40 nanometer increase is actually good for continued margin expansion for you?

Definitely I think we need to be moving forward.

40 nanometer we have to do it and it will help our overall margin.

Okay.

I'll follow up later on that.

It's not a drag, definitely not a drag at all.

We try to ramp 40 aggressively.

Is 40-nanometer gross margins at a corporate average, mid-20's type gross margin today?

I think for us 8-inch and 12-inch they are different.

We are accounting the -- I guess it depends on your accounting practice, how you account your -- it is a big chunk of our depreciation and other things.

So I think in the 12-inch domain our 40-nanometer margin is good, relatively speaking.

Okay.

And then you talked about fourth quarter will see significantly more capacity release and some going into the first quarter.

Could you help me understand the sequential growth in total capacity in the fourth quarter and the first quarter?

Do you have --

For the full year we are expecting 4% capacity growth and almost all of the 4% coming from 12-inch, so that will be about 8% in 12-inch alone.

And we see mild growth for the first three quarters of the year.

And we're probably talking about close to 3% growth in the fourth quarter.

Yes, 2% to 3% growth in fourth quarter.

Okay.

And then can you just talk about -- that still seems like relatively minor amounts, given the CapEx that you're increasing here.

Will there be a step function somewhere out there, where you end up having a 5% plus type sequential capacity growth?

Are you seeing roll-offs elsewhere that are offsetting this?

I'm actually quite surprised that your capacity is not growing more quickly.

So our capacity, as I mentioned, over 20% this year are for conversion and I think over 20% are for the aggressive facility and other things.

So overall speaking we are just moving along as what we planned.

And then also, as I mentioned, there will be a one-quarter lag, so some capacity release next year based on this year's CapEx.

It's a continuous release.

All right.

And then last question from me, a little longer term.

I think we've seen with TSMC, certainly, in ramping 28 nanometer, the capital intensity really picked up there and they're spending, I would say, a significant amount, already $1b or so this year.

That investment cycle is still very much ahead of you.

And I know you guys don't like to talk about CapEx plans for next year or the year beyond, but could you just help me think about longer-term models with this type of investment cycle ahead of you?

And what should we be thinking about for UMC in the next couple of years?

Maybe just CapEx as a percent of revenue?

Is there some way of targeting it?

Well, I think one thing we want to achieve is really a cash flow balance, so most of the capital expenditure should be funded through internally-generated cash.

So that will be the major guideline.

So we don't want to over-leverage and we don't want to dilute.

It's too much on our equity or shareholders' equity base.

So pretty much it all depends on how we generate our internal cash.

So how we come to profitability and returns on our investments we make over the last two, three years will be a key indicator for the future capital expenditures.

Okay.

So can I walk away from that comment thinking that the negative free cash flow you're seeing this year, you're hoping for next year to maybe keep that a little bit more in balance and you'll control CapEx relative to the operating cash flows available?

Yes, may not be a one-year target.

We're talking about multi-years and so that's the idea.

All right.

And if I can just sneak one last quick one in.

The quarterly depreciation charges, obviously, capacity is not stepping up very quickly here, so I just want to make sure I'm not going to see the same thing in depreciation.

When you look out -- especially in the depreciation specific to your cost of goods sold, when you look out over the next one, two, three quarters is it a steady increase, or help me understand how that line item within COGS changes?

So for 2012 depreciation should grow less than 10% year over year compared to last year and we estimate CapEx of a certain amount.

We expect the depreciation increase in 2013 will be slightly bigger than 10%.

And it's going to be linear.

And linear.

Thank you.

And your next question comes from the line of Donald Lu.

Good evening, I have two questions.

First is on the margin structure.

I think in second and third quarter you have had about 25% gross margin at around 85% -- 84% utilization rate.

That's quite stable relative to your historical trend.

But with the 28-nanometer ramp in Q4 and early next year would you expect the margin structure to maintain at the same level, or is there going to be under some pressure, as was the case with TSMC?

I think the margin there are quite a few factors, one is definitely the depreciation.

The other is the utility cost increase in Taiwan.

One is the summer utility; one is the utility general increase in Taiwan.

As far as the 28-nanometer factor, that really depends on the year, the progress and status --

Right.

So --

-- in perfecting the overall margin for that specific node.

And overall it depends on the ratio to the overall revenue percentage.

For us we are targeting 5% revenue and I don't think it will cause much impact either way at this stage in Q4.

I see.

And for the overall Company is there an estimate on the overall return for -- at a different node?

For example, what's the ROE or the ROIC for 40 nanometer, or 28 nanometer, or [19] nanometer?

Is there a trend that we can follow for UMC at this point?

And whether the ROE -- basically I'm trying to get is whether -- what's the trend for ROE if you start to increase CapEx at 28 nanometer and also (inaudible).

So the leading-edge nodes, again, as I mentioned, yield is a big factor.

If we can hit our yield road map the leading-edge node for UMC is actually margin accretive, but it may take some time to reach the yield road map target.

If you can reach the yield target the margin for the leading node is actually margin accretive.

I see, okay.

Great.

My last question is on -- more on the demand side.

Seems like the -- for the Q3 weakness on base band, is that a demand issue, or is that a market share issue from your customers, or it's more like customers are not doing well?

That's -- I think that's pretty much a UMC -- it's our UMC specific.

We have some base band customer we probably billed too much.

They ordered quite a lot in Q2.

It's just the adjustment in Q3.

I see.

So that's why the segment change; it's UMC specific.

It may not reflect the overall market situation.

Great, thank you.

Thank you.

And your next question comes from the line of Satya Kumar of Credit Suisse.

You suggested that you'll do a FinFET node at 20 nanometer at some point in 2014.

I was wondering what the plan is after 20 nanometer?

Are you going to 16 nanometer, or are you going to 14 nanometer?

And how does that decision -- how will you make a decision relative to, for example, availability of EUV technology?

So the -- with UMC we will follow the industry technology road map.

And after 20 nanometer it's a little bit confusing now.

Somebody have 16 and we are still having the 14 in our road map.

And it's also up to the maturity of the EUV tool.

If it gets pushed out further maybe most of the company will adopt the 10 nanometer.

Then whether or not we want to do another node in between with multiple patterning, either triple or quadruple patterning, it's a question, so we are still watching it.

They may have some changes in the industry.

But we are seriously committed on the 20-nanometer planner and the 20-nanometer back-end with FinFET front-end.

Whether we define that as a 16 nanometer or some other things is really a marketing thing.

Understood.

I think you said -- 2012 you gave a breakdown of the CapEx mix for a portion of your CapEx.

I think you said 20% is for conversion, 20% is for facilities conversion.

Could you perhaps give us a full breakdown?

I'm particularly interested in knowing what portion of the CapEx you spend this year on 28 nanometer and what portion is on 40 nanometer, for example.

I think for this year most of them are for 28 nanometer, I think, a significant portion.

I don't have the final breakdown in details, but I think majority are for 28 nanometer.

Okay.

And at this point the utilization rates you mentioned 84% and will be flat in Q3.

Can you give us a sense of the utilization rate on 28 and 40 nanometer and how you expect that to track over the next few quarters?

In general our leading-edge node are better loaded.

And I mentioned also earlier our 8-inch and the legacy 12-inch are weaker in the second half.

Also I forgot to mention our -- actually, 28 nanometer and 40 nanometer the capacity are quite transferable, so you can cover both nodes with a very big common tool list.

So that's where we are.

Okay, thank you.

Thank you.

Your next question comes from Randy Abrams of Credit Suisse.

One moment.

Mr. Abrams, your line is open.

Thank you.

Yes, hi.

Can you hear me?

Yes.

Yes, okay.

No, sorry about that.

Yes.

A follow up to the last question from Satya on the 40 nanometer, where the capacity is fungible.

If you install new capacity for 28 nanometer but the demand comes through stronger on 40, would you have a margin hit for that incremental capacity if you need to load that with 40?

I'm just trying to understand, because it seems like the 40 nanometer is taking off with better momentum now.

I don't have that calculation, but our goal is -- first of all, our capacity arrangement with customers are arranged early.

Usually we check with them very seriously and carefully so we reserve their capacity.

But for some other reason they cannot come or the market situation change, we can move the capacity around between 28 and 40.

But for UMC I guess we need to move aggressively forward.

Even at the early stage 28 nanometer yield is not as good as the 40, but we need to move forward.

That's very clear for us.

Okay, makes sense.

And as you go into a slowdown into second half it seems like this year industry foundry pricing held up reasonably well.

How is the pricing environment as you go into second half and start to think about negotiating for next year, if you continue to expect it to hold up at these levels?

I think this number change.

These inventory cycles I think become very frequent and shallow and short.

So if customers come to us, really negotiate -- negotiating really hard -- usually they don't do that.

It's really the pricing is a longer-term cycle thing.

It's not a spot market.

I don't think it's an issue.

Okay, great.

And you talked about trying to maintain stable free cash flow where you can fund operations, or use operations to fund the CapEx.

For your dividend, just thinking about it over the next couple of years, what would the target payout be?

And would you continue to use -- I guess you can get low-cost financing to maintain the dividend.

Well, we will try our best.

We have been paying certain amount of dividend over the last few years and that's certainly a goal.

And that's also included when we talk about this balanced internal cash flow.

Okay, thanks a lot.

Your next question comes from the line of Steven Pelayo of HSBC.

Yes, just a couple of quick follow ups here.

Maybe a status check on 40 nanometer and 28 nanometer.

Is there any numbers you can quote to us on number of tape outs, products and production, number of customers and where that currently stands?

Can you give us some kind of milestones we can follow here?

Yes, sure.

For 40 nanometer we have 101 product tape outs.

And for 28 nanometer we have, I think, 18.

18, yes, 18 IPO product tape outs so far.

Okay.

And then a couple of weeks ago you guys, I guess, did the press release aligning with IBM.

I guess I'm trying to understand a little bit of the motivation behind this.

I know you've been positioning yourselves as a viable second source to TSMC.

You talked about your gate-last alternatives.

Your press release also talks about you guys having an internally developed 20-nanometer FinFET solution as well.

So are you just trying to make sure you can be a second source to any product made at any foundry out there, or help me understand the alignment with IBM here?

No, no.

IBM alignment in the technology license is mainly for the FinFET three dimensional transistor license.

And since today the FinFET is available on the 20 nanometer IBM framework, so it's the natural development for us to work with IBM.

IBM, I think their R&D is still world class and we have the strength of manufacturing implementation.

For UMC to develop a FinFET from scratch is very challenging.

So this is a great arrangement to help us get -- to have -- to kick start our FinFET effort.

So that's the main purpose.

And also at 20 nanometer they are all gate-last from the industry.

There is no more gate-first.

So also our 20 nanometer, which is aligned with IBM on the design environment, and also that's the base to build a FinFET, so give us a great opportunity to head start our FinFET technology development.

That's the main purpose.

Okay.

And then last question from me.

I'm trying to understand when you talk about legacy nodes being relatively, I guess, softer for you, or lower utilizations, or something like having excess capacity; I forget how you phrased it.

On 300 millimeter legacy, I'm just trying to understand, you consider 65 nanometer legacy, or what's the most trailing-edge node you're still doing at 300 millimeter?

We have been doing 12-inch for over 10 years, I guess.

Today the largest node for us, the 12-inch, I should define as 0.13.

We still have some 0.13 capacity, some 90 and 80.

So for the legacy we are in a transition.

We are trying to back fill with specialty technology like high-voltage CMOS image sensor.

So the legacy like 0.13 is weak and the 90 in a transition.

So those are the -- 65, relatively speaking, you can define as a legacy today.

Yes.

All right.

And if I can just sneak in one more.

Relative to increased IDM outsourcing there's even been rumblings, certainly out of Japan, but there's even been some rumblings about maybe even major customers like Samsung looking to move some more parts over to Taiwan.

Is that something that UMC is benefiting from?

I cannot discuss with any specific customers.

And even IDM they are always having a portion, either -- actually growing portion of outsourcing.

We are definitely engaging with many of them, yes.

Okay, thank you.

Yes, thank you.

Your next question comes from the line of Donald Lu of Goldman Sachs.

Hi, I have a follow-up question on the IBM alliance.

I remember years back that UMC has had some unpleasant interference to license technology from IBM.

What would you think this time around IBM technology would be much better?

And also related to that is when will UMC deploy FinFET?

Will that be at 20 nanometer, or at 40 nanometer?

Yes.

So for the first question, yes, in the past we worked with IBM many years ago.

It's not a technology license.

It's a JDP; it's a joint development program.

So we sent people to New York to -- sent lots of people to there to have a joint development program.

And also that's the very, very beginning of the IBM alliance.

But through the years I think IBM maintained their leadership in R&D.

Their research and development I think is still world class.

And UMC's strength is really in the manufacturing implementation.

I think their FinFET is very competitive and by working with them -- and this time the difference is that we license the technology.

All the implementation, everything, will be done inside of a UMC factory in our Tainan Fab 12A.

We will not send any people to IBM's facility.

So that's the very big difference.

So combining two companies' strengths I think is very good.

So the second question is about the FinFET implementation.

Today I think almost all the companies, including all the other foundries, many companies are implement -- trying to implementing FinFET in the 20-nanometer back-end design rule.

And for foundry we define the technology node -- at least for UMC we define the technology node by the back-end design rules.

So, in other words, for 20 nanometer the back-end [rule] metal pitches at 64 nanometer.

So we'll first roll out the planner technology.

And then we will -- under the same back-end metal rule we'll add FinFET technology, roll that out.

And I understand some other companies defined that as a 14 or 16, but that's really the FinPITCH.

So it's really a marketing definition.

So our first generation will be 20-nanometer back-end with a FinFET front-end.

Okay.

So that's basically in sync with other foundries' announced road map?

We believe so.

And the customers are driving it.

Sure.

And another question is Qualcomm recently have indicated that it would be interested in investing in manufacturing capacity.

Would UMC be willing to take equity stake if there's such a demand?

I cannot make any comments on specific customer.

But UMC actually did announce as -- I think our -- after our general stockholders' meeting we are offering a private equity placement of 10% for UMC equity and seeking -- and we are welcoming strategic partners.

This is not for financial purpose; really for looking for strategic partners.

And, as you know, the industry landscape is shifting aggressively now.

The structure is changing.

The vertical supply chain partnership is getting more and more important.

So we very much welcome the partnership.

So the strategic investor are more like a customer, or is that more a technology partner, or both?

Either way we will welcome all the -- any discussions.

But it has to be helping UMC strategically, either technology or above and beyond a business collaboration.

And just to help us understand, does -- UMC has basically -- for 28 nanometer you are probably a year or so behind -- a year or more than a year maybe behind TSMC, but it's not any worse than 40 nanometer.

Does that mean it's not really -- is that really getting much more difficult as you go from 40 to 28, 28 to 20, or it's not really the case in terms of R&D intensity?

I think the new nodes -- the new technology nodes are much more difficult.

And today the industry technology is Intel.

They are ahead of anybody by a large distance, I think.

If you consider FinFET, they are having FinFET product on Ivy Bridge at 22 nanometer today.

You can buy products out of that.

And everybody else FinFET is quite a few years behind them.

So own technology.

That's one of the reason why we are also collaborating with IBM on the FinFET licensing.

Right.

The answer is yes.

It's just how much behind of Intel.

If that's the case is there a -- a minimum CapEx or capacity requirement for UMC to still maintain 5% ROE for a new node?

In another way it's more like a breakeven capacity, certain scale you would need at 40, 28, 20 nanometer.

I think we should be fine.

I think today it's very clear down to 20 nanometer FinFET we are fine.

These new nodes, I think, the capital intensity is high and we expect the ASP will be high also.

Not too many companies can offer this.

So the overall supply chain, profit and the risk distribution should be reasonable.

So -- but beyond that, for example, 10 nanometer with EUV and 450 that's a different story.

But down to, I think, a 20 nanometer with FinFET will last a long time, yes.

In the foreseeable future I think we are fine.

Right.

Thank you.

Thank you.

And our final question comes from the line of Richard Clode from Pioneer.

Hi, it's just a follow up on 28.

Beyond the tape outs is there anything you can say to give us some confidence in terms of the ramp there?

I know in the past you've worked on poly-SiON and so you're quite comfortable with that process.

But there seems to be a lot of debate into the market in terms of you delivering on your 28 strategy.

Your question is on the high-k product with 28 nanometer?

No, the poly-SiON.

Poly-SiON I mentioned earlier.

So we will -- internally we are targeting 5% of our revenue by the end of this year from poly-SiON 28 nanometer.

Yes.

Beyond the 5% target which you've had for a while and the tape-out number, is there anything in between that you can give us to give us more comfort now that we're starting to get closer to that sales target, in terms of yield improvements, in terms of capacity installation, anything like that?

So for our design-in customers the yield is quite encouraging.

And with some other programs, I mentioned earlier we are working hard on the parametric matching and the software improvement.

We will be there.

And it's a tedious, serious matching program on the -- between the process and design.

Yes.

Okay.

But everything is on track in terms of what you were thinking in line with your targets?

Yes, I think so.

Yes.

Great, thank you.

Thank you.

At this time I would like to turn the call back over to management.

Thank you again for your interest in UMC.

Please feel free to contact us directly if you have any additional questions.

Now, operator, back to you.

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 Events section.

You may now disconnect.

Good bye.