Earnings Call: Q4 2016

Jan 23, 2017

Summary

Q4 revenue and gross margin improved QoQ, but full-year net income declined 38%. Q1 guidance reflected lower shipments and ASP and mid-teens gross margin; 2017 investment targets leading-edge and Xiamen capacity.

Welcome everyone to UMC's 2016 fourth quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask 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, www.umc.com, under the Investor Relations, Investors 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 fourth quarter of 2016. I am joined by Mr. Po-Wen Yen, the CEO of UMC, and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our CEO's key message to address UMC's forecast and the first quarter 2017 guidance. Once our CEO and the CFO complete their remarks, there will be a Q&A section. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For this risk, please refer to UMC's filing with the SEC in the U.S. and the ROC securities authorities. I would now like to introduce UMC CFO, Mr. Chitung Liu, to discuss our fourth quarter 2016 business results. Thank you, Bowen. I would like to go through the fourth quarter 2016 investor conference presentation material, which can be downloaded from our website. Starting on page 3, the fourth quarter of 2016 consolidated revenue was TWD 38.31 billion, with gross margin at 22.9%. The net income attributable to the stockholder of the parent was TWD 2.55 billion, and the earnings per share for this quarter were TWD 0.21. For operating results summary, our capacity utilization rate in Q4 last year was 94%, about 5 percentage point improvement from the previous quarter. For cash on hand, it is around TWD 57.5 billion. Because of the higher shipment, revenue grew by about 0.4% compared to third quarter 2016 to TWD 38.3 billion. Gross margin was 22.9%, about 5.5% improvement from the third quarter of 2016. Net income is NT 449 million due to higher non-operating losses, which we will go into detail later. The net income attributable to stockholder of the parent was NT 2.54 billion. EPS was 0.21. For the full year, revenues show about 2.1% year-over-year growth to NT 147.87 billion. Gross margin percentage was 20.5 or NT 30.3 billion. Operating income is about 4.2% or NT 6.2 billion. Net income attributable to stockholder of the parent was NT 8.3 billion, or 38% year-over-year decline. EPS for the full year is 0.68. Other than our NT 57.5 billion in cash, our total asset also reached NT 386 billion. As for operating segment, most of our profit comes from wafer fabrication in Q4 2016. The losses come from new business has come down and become quite insignificant on a consolidated basis. ASP showed a few percentage decline in Q4. For revenue breakdown, Asia go up to about 45% in Q4, North America declined by four percentage points to 48, Europe and Japan remain unchanged. For the full year, we also see a decline in Europe and Japan business unit. Asia continue to grow to 44%, North America remain our largest market with 49% of our revenue. IDM remained unchanged for 7% for Q4 over Q3 in 2016. But the full year has shown a decline from 12% in 2015 to 8% in 2016. In terms of segment breakdown, consumer is unchanged. Communication still remains around 53% also, computer is 13%. For the full year, it doesn't really change much compared to 2015, with communication accounting for 53% of our total revenue. 28 nanometer set the record in Q4 of 2016, with 22% of our total revenue. 40 nanometer revenue and below account for 48% of our total Q4 revenue. For the full year, 28 nanometer showed quite an increase from 10% in 2015 to 17% in 2016. For 40 nanometer, the percentage has also increased from 24% to 27%. We will see some capacity decline due to annual maintenance in Q1 2017. But we continue to invest in our leading-edge capacity for both 12A, 12I, as well as our Fab 12X in Xiamen, China. We budget around $2 billion CapEx for 2017. Majority will be our leading-edge capacity. So that above is a summary of UMC's result for Q4 2016, and more details are available in the report, which have been posted on our website. I will now turn the call over to Mr. Yen, CEO of UMC. Thank you, Xi Dong. Hello, everyone. I am glad to update everyone UMC's fourth quarter operating results. In the fourth quarter of 2016, UMC's revenue from foundry operations was NT 38.22 million. The overall capacity utilization reached 94%, bringing wafer shipments to 1.66 million 8-inch equivalent wafers. Operating margin was 6.3%. During the quarter, our 28 nanometer and 40 nanometer utilization rate continued to exceed 20%, while strength in 8-inch consumer and communication demand raised 8-inch fab utilization to nearly 100%. We also realized a noteworthy milestone in November with the grand opening of our 300-millimeter Fab 12X, in Xiamen, China, which began shipping 40 nanometer consumer customer wafers just 20 months after the fab's March 2015 groundbreaking. This sign will ideally position UMC to capitalize on the vast business opportunities within China's semiconductor market while bringing us closer to our Chinese customers, where our team can provide us superior technical and manufacturing services and more efficiently bring new tape-outs into production. With regard to our advanced 14 nanometer technology, we have recently made substantial progress for this advanced node. Following intensive engineering activities with our customer, UMC's 14 nanometer transistor performance has delivered speed and leakage results which are comparable with industry's 14 nanometer standards. Our yields have fulfilled customers' requirements, and we anticipate 14 nanometer wafer shipments to commence in fourth quarter 2017, highlighting our determined efforts to reach this important milestone. Looking into the first quarter of 2017, as we enter early year seasonality, we expect sequential decrease in our foundry revenue. For full year 2017, UMC will continue to work towards a year of growth and prosperity. Our fundamental 28 nanometer process technology know-how will enable our team to develop new manufacturing solutions on logic and specialty technology platforms. We will also expand 300 millimeter capacity at Fab 12X to address growing customer wafer demand, increase our foundry market share, and elevate the competitiveness of our foundry services. We believe these efforts will position UMC to capture the next wave of growth opportunities. Now allow me some time to summarize the recent highlights in Chinese. Fab 12X began mass production in November 2016, from ground breaking in March 2015 to customer certification and official production, it took 20 months. Fab 12X's geographical location brings United Microelectronics closer to its customer base in China, providing comprehensive technical resources and foundry services to the vast China semiconductor market, effectively assisting customers with new design projects to enter mass production. In the 14 nanometer advanced process, through close engineering collaboration with customers, our 14 nanometer technology meets industry standards in electrical properties, speed, and power consumption. Recent yields also meet customer requirements, expected to begin shipping in the first quarter of 2017. This also indicates that United Microelectronics' efforts to provide 14 nanometer solutions have reached a new milestone. Affected by the seasonal impact at the beginning of the year, we expect foundry revenue to decline compared to the previous quarter in Q1. 2017 is a crucial year for our sustainable growth. In addition to developing more diversified logic and special technologies on the 28 nanometer process, we will increase shipment volumes of the Fab 12X to meet customers' growing needs, thereby enhancing United Microelectronics' market share and strengthening our competitive advantage in foundry services. We believe these efforts will position the company for the next wave of growth. Now I have finished my remarks, and let me go over the first quarter 2017 guidance. Our shipments will show a decrease of approximately 1%. The ASP in TWD will show a decrease by approximately 3%. UMC gross profit margin will be in the mid-10s of percentage point range. The capacity utilization rate will be approximately 90%. Our foundry CapEx for 2017 will be $2.0 billion US. That concludes my comments. We are now ready for questions. Operator, please open the lines up. Thanks. Thank you, Mr. Yen. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press 01 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press 02 to cancel the question. The first question is from Randy Abrams from Credit Suisse. Please ask your question. Okay. Yes, thanks a lot. Good evening. I wanted to ask the first question about the CapEx $2 billion budget. If you could talk about how much capacity you plan to ramp at your China, the Fab 12X, and then also within that, for total, how much you expect 28 nanometer capacity, if you could give where that 28 capacity is now and then your plans to ramp additional 28 capacity through the year. Yes. Our CapEx for China is about 50% of total CapEx for 2017. Our China 12X fab capacity will increase from 3,000 wafers per month up to 11,000 wafers per month. We have a CapEx allocation on the 28 nanometer expansion at our Fab 12A on Tainan, Taiwan. So we increase from 29,000 wafers per month to 35,000 wafers per month. Okay, great. The second question, I wanted to ask about the first quarter sales and gross margins. First, if you could talk about the sales, it is holding up shipments relative to your peers. Could you talk maybe by application, how the applications are performing in 8-inch versus 12-inch? But then also on gross margin, it seems like the decline is a bit more than normal, to decline to mid-teens. So the factors, if it is the ASP reset beginning of the year, or another factor on the gross margin. Yeah. I will look on the first quarter 2017. By application, the communication and computer, we have a few percentage drop compared to Q4 last year. Consumer will increase a few percentage points. Okay. On the consumer, is there certain applications driving consumer to grow, or first quarter is normal seasonally down or fewer working days? Yes, we see that the microcontroller units have a stronger demand on 1Q 2017. Okay. If you could talk about the gross margin, what was the factor to guide down to mid-teens? Whether there is ASP mix or another factor? Yes. ASP definitely is a factor. We have a lower utilization rate for 28 nanometer in Q1, which result in a lower blended ASP for Q1. Also for Q4 last year, we have some insurance claim to help our overall gross margin. The insurance claim in Q4 last year was over TWD 1 billion. That also raised the gross margin in Q4 last year. Okay. The last question, the non-operating loss, if you could go through, I think you disclosed part of it was a one-time, just the couple non-operating charges that you took. If you expect are back to normal break even as we go into Q1. Yeah. For Q4, there were a few one-off items and also some short-term items. Other than the one we disclosed, which is a solar farm invested by our investment company. That is one-time impairment loss, around TWD 600 million. Also, we have higher interest expenses coming from our Fab 12X, which in the beginning is highly geared before more capital will be pull in. They also encounter some forex losses because of the weakness in the RMB, and they also have no USD-denominated revenue to offset the weakness in RMB. The situation should improve along with more invested capital in Xiamen as well as increasing USD-denominated revenue. Okay. We could still have some losses or we get back to normal or near breakeven looking forward? I think our goal is try to manage to a more breakeven level. It also highly depends upon the level of stock market, which give us some room for disposal gains. Okay. All right, great. Thanks a lot, guys. Thanks. The next question is from Michael Zhou of Deutsche Bank. Please ask your question. Hi, good evening. Two questions. One is, when would you see your Xiamen fab to enter 28 nanometer mass production? Currently, they only plan for 40 nanometer production. We will apply to Taiwan regulators for approval to initiate 28 nanometer production once our 14 nanometer starts shipment in Taiwan. Okay. Do you have a rough schedule? It could be first half 2018 or even later. Of course, it's to our interest to try to expedite the whole process. But again, it's really up to the regulator in Taiwan. Sure. Okay. Second question. Do you have any color for your 28 nanometer sales portion by end of this year? Yeah. You are asking for the full year average, or? Full year average is fine, or end of this year. No, we don't have the exact numbers for now. We are target- Can we say your sales portion will still be higher than last year, or you think that the sales portion will drop this year? Yeah, we believe in the second half, especially the Q4 this year, we believe we will achieve more than 20%. Okay. Revenue share coming from 28 nanometer. Okay. A follow-up question is, can you give some color for the sales portion between polysilicon and the high-k metal gate in 28 nanometer this year and last year? In the last years, we have about equivalent share between the 28 high-k metal gate and the polysilicon. This year, it will change very much quarter by quarter, and we are still pushing to have a higher revenue contribution from high-k metal gate. Can we say you should have a higher high-k metal gate sales portion versus polysilicon this year? Compared to 2016. 2016, you mentioned, is 50/50. Can we say you should have a higher high-k metal gate sales portion by end of this year or the whole year as well? We do not have exact numbers for now. But- I would say that first half, 28 polysilicon will have higher revenue. Sure than our high-k metal gate. The second half, we are expecting the high-k metal gate will become the strongest revenue contribution. Okay. Can we say second half this year, we should see high-k metal gate to exceed polysilicon sales portion? Yeah, we are targeting on that. Okay, sure. Thank you. Back to the queue. The next one is from Donald Lu from Goldman Sachs. Please ask your question. Hey, good afternoon. My first question is on 40 nanometer. I see the percentage of 40 nanometer revenue has not increased, but you are investing in Xiamen. What is the projection for the Xiamen 40 nanometer revenue for this year? That is my first question. Second question is on ASP. in Q1, I think Qidong commented 28 nanometer revenue might decline a little bit, but why is it declining 3%? That is quite significant. Is there more than expected pricing pressure on 8-inch or 12-inch? Thank you. Allow me to take the first question. You are mentioning about the Xiamen. We are now ramping the 40 nanometer products, customers' wafers in the Xiamen fab. As Qidong just explained, we will follow Taiwan government N minus one technology restriction. After we have the 40 nanometer revenue coming from customers' wafers, then we will ramp our 28 nanometer in this Xiamen fab. Mm-hmm. But why in Q4, we see the 40 nanometer revenue actually has been flat almost with Q3? Donald, the Xiamen fab only turned mass production officially starting from the month of December in 2016. They only have nearly almost no contribution from a wafer out point of view. Most of the wafer out will only start coming in Q1 this year, and also very minor. We are talking about few thousand wafers only. Very minor. Okay. For the ASP, you are referring to about 3% decline. Well, I did not say the 28 nanometer will decline a little bit. I said 28 nanometer will decline in Q1 as a percentage of revenue. I think that is probably the main reason for the whole 3% blended ASP decline. Okay. The 3% is because 28 nanometer revenue, the percent in the mix will decline in Q1. Mostly. Of course, there is some price adjustment as well for beginning of the year as always. Has the overall pricing pressure become a little bit more than last year or is that similar? Similar in that Q4 ASP, if you are aware, we already show a few percentage decline in Q4 alone last year. That is mainly attributed to the more mature node pricing competition. For Q1 this year, it is mainly due to the sales mix of 28 nanometer revenue decline. Okay. Thank you. Thank you. The next one is from Roland Shu from Citigroup. Go ahead, please. Hi, good evening. Thanks for taking my question. First question is for your first quarter shipment guidance. You said your first quarter, the utilization is about 90%, which is lower than 94% in full Q last year. The capacity in first quarter this year will be also lower, due to the annual maintenance. By these two factors, can you give us some more color? How will this first quarter shipment guidance only decline by 1%? Thank you. Roland, as always, there is a wafer in pipeline and wafer out. Different definitions. When we calculate loadings, it is based upon wafers in the pipeline. Some of the wafer produced last quarter will be shipped this quarter. I think that is the main reason. Okay. Are these more 12-inch wafer or 8-inch wafers? There is no specific trend. This is more like across the board, random, like business as usual type of wafer ship, wafer out type of lag. Okay, understood. Second question is, look at your 8-inch wafer utilization increased from 90% in 3Q to almost fully loaded in 4Q. But I look at your 8-inch wafer revenue, only increased by 6%. Was it because ASP decline or product mix change? How about the overall 8-inch wafer revenue outlook in this year? Thank you. As I mentioned, Q4, we saw some pricing decline, mainly due to pricing competition in the mature node, largely in the 8-inch space. Yes, you are correct. Pricing was quite competitive in Q4 last year for 8-inch. How about the overall 8-inch pricing competition in this year? Q1 overall blended ASP is 3%, but the pricing is pretty much done. It has reached a level of a plateau. We don't have a full year outlook yet. Mm-hmm. Okay. How about the overall 8-inch wafer revenue for this year? Since last year, actually, your overall 8-inch wafer revenue have been declined. How do you think about this year? I would say it would decline a little bit because of price erosion. year-on-year. However, the full loading in the 8-inch fab will continue, at least, for the first half of this year. That will allow UMC to improve our product mix, depend our ASP, average ASP. Okay, understood. Last question is for your insurance claim in last quarter. Was it all in the cost of goods sold line, or is there any claim in the other lines? Thank you. It's all cost of goods sold. Okay, so more than $1 billion was all in the cost of goods sold? Yes. Okay. Thank you. These are all my questions. Thank you very much. Thank you. The next one is Rick Hsu from Daiwa Securities. Go ahead, please. Yeah. Hi, Happy New Year, Qidong and CEO and Bowen as well. My first question is, can Qidong elaborate your non-GAAP, the net investment loss again? I think the total is at TWD 1.1 billion, and you mentioned about some loss from your solar farm. Can you elaborate more in details? Yes. There are three or four major components. The one-off part is the impairment loss coming from our solar farm investment by our investment company. I think that's around TWD 600 million in Q4. We also have higher interest expenses because of our Xiamen fab is highly geared in the early stage of operation. At the same time, they also encounter foreign currency losses due to weaker renminbi. Because they don't have U.S.-denominated revenue to offset that yet, they are currently suffering from higher ForEx losses. The situation for both interest expenses as well as ForEx losses should gradually improve in 2017 because of their U.S. dollar revenue as well as of higher injected capital. Okay. Thank you. That's clear. Could you give us your depreciation guidance for this year on linearity quarter basis? For last year, 2016, depreciation expenses increased by a little bit more than 15% year-over-year, with Q4 is the highest quarter. For 2017, we expect to see another 5%-10% year-over-year increase, with each quarter is quite average, so quite similar. We see maybe 1% or 2% increase for Q1 over Q4 last year. Okay. About 1%-2% sequential increase in Q1 this year, right? For your depreciation. All right. The last question from me is, how do you see your customers' inventory levels? Do you see any inventory issue in the first half, or you think it's okay, pretty healthy? Our inventory in 1Q is pretty much flattish. Huh? We don't see any. Pretty much flat. Okay. When you say flattish inventory, that's your own inventory or your customer's inventory? Our own inventory. Oh. Our days of inventory. What about your customer's inventory? Do you have any idea about your customer inventory? Most of customer, they have some uncertainty. They do not provide the clear numbers for us. Yeah. All right, fair enough. Thank you so much, guys. Thank you. The next question is from Steven Pelayo from HSBC. Go ahead, please. Great. Why don't we start on 14 nanometer? You talked about some wafer shipments commencing in the first quarter. Maybe you could talk a little bit about the number of designs, capacity plans, and maybe revenue targets, let's say, by the end of the year for 14 nanometer. Yes. We are beginning shipping 14 nanometer, 14 revenue, in the first half, actually, in this quarter. There are more in the second quarter coming. Our CapEx for 14 will be just around 2,000 wafer per month. That's our status. Okay. Do you have a target maybe by the end of the year for that capacity and maybe the revenue that potentially you could get by the end of the year on 14 nanometer? Yeah, we don't have. We will give you more color in the coming, next, in the April's conference call. But so far, we are engaging Okay with multiple customers. Their test chip. For now, yeah, that is our focus, to engage more potential adopters. Okay. I am wondering if you could just talk a little bit, I guess you were fairly free cash flow negative in 2016. Do you think we can be above breakeven in free cash flow in 2017? It depends on how you look at the breakdown. For UMC Taiwan, yes, we are going to see positive net free cash flow for the first time in recent years. Our JV in Xiamen still will encounter heavy investment, which the negative cash flow is expected. Okay. Just one final question. I know you talked about 28 nanometer declining as a percentage of revenue in the first quarter. Can you be a little bit more specific there? Are we talking 5% decline quarter-on-quarter in dollars or something more significant? Can you be a little bit more clear there? Yeah. Our first quarter, the revenue contribution for 28 will be at around mid-teens percentage point. Mid-teens? Yes. Okay. A fairly significant decline. Is there any more details behind that? I think in the fourth quarter, it was around 22% of revenues. Yes. There are some market dynamics. The first wave customers, they are migrating to advanced node earlier than expected. The second wave of customers, we are heavily engaged, are coming later than our expectation. That comes up our first quarter, 28 nanometer is under loading. Okay. Well, now I am still impressed, though, with your offsetting it elsewhere. If 28 nanometer falls from 22% of revenues to mid-teens, what node is growing then for you to offset that in the fourth quarter? Or in the first quarter, pardon me. In the first quarter. The first quarter is. Again, what is your question, please? Well, you just suggested that in the first quarter 2017, 28 nanometer revenue would fall to the mid-teens, and that is from the 22% of revenue level in the fourth quarter. Giving your guidance for shipments, it would suggest that some other node is definitely up sequentially. What node is strongest for you, I guess, in the first quarter? Yeah. Actually, our 40 nanometer is still very strong. 40 is very full. Our 8-inch is also full. That support our. The overall utilization is around 90%. Okay, great. Thank you very much. Thank you. The next one is from Charlie Chan from Morgan Stanley. Go ahead, please. Hi. Thanks for taking my question. Could you please elaborate, what kind of a consumer product is strong in the first quarter? Are those TV set-top box or anything related, or we can assume that it's a driver IC? Yeah. It's a microcontroller unit. It's the strongest product in the consumer segment. Mm-hmm. Are those MCUs for what kind of consumer, is it home appliances or toys? Or what kind of consumer? Mainly for home appliance. Home appliances. Okay, thanks. May I get a sense about your OPEX trend, in terms of absolute dollar or percentage of revenue in 2017? Yeah. It's our goal to maintain a stable percentage of revenue, in the OPEX. But there will be also quarterly pattern as well. Normally, Q1 is always the lowest, and Q4 is always the highest. Okay. I thought that there was some one-time OPEX last year when you ramped up the Xiamen fab. Is that kind of recurrence OPEX, or the power of OPEX will disappear in 2017? The early startup costs associated with Xiamen fab is counted under OPEX until the end of November last year. Okay. Starting from the mass production in December, all the cost item will go to the appropriate lines. Meaning cost of goods sold would increase a little bit. Yes OPEX will decline slightly. That is right. Okay. Yeah. Lastly, I want to make sure for your CapEx for Xiamen fab, will there be any contribution from Xiamen government? How do you share the CapEx? We don't share CapEx. We share capital injection, the paid-in capital, according to the investment agreement. UMC, after this year, 2017, we are budgeted to inject $450 million. After that, UMC will control over 50% of the JV. Currently, we only control about 32%. Okay. Lastly, I guess our investors would be curious. You didn't give explicit full year revenue guidance, but just in the sense of outgrowing or undergrowing industry. Let's say, foundry industry growth is high single digit, what do you think your growth rate would be? Our numbers for the semiconductor industry is on the year-on-year growth rate will be around 5%. For the foundry segment, excluding memory, our numbers is 7%-8%. Right. UMC will have a mild growth in 2017. Mm-hmm. So means a low single-digit growth. Am I right? We will be in line with semiconductor industry's growth in- Okay 2017. Got you. Okay. Lastly, it seems like your utilization rate is like a full percentage lower than 1st quarter. Do you expect for same in 2nd quarter revenue will see a sequential decline? As Roland just asked, your 1Q shipment declined only 1%, so I always assume the wafer outs for 2nd quarter could be even lower. Yeah, we don't guide for that far, and we'll give more color in the Okay, yeah. coming April's conference call. Yes. Okay, so on the pricing pressure part, do you think those pricing pressure or competition in 8-inch comes from Taiwanese industry peers, or is that coming from Chinese foundries? Yeah, it's across the board, but we are more concerned on loading. As I just explained, once we improve our utilization rate, we will have a better position to optimizing our product mix to improve our ASP. Okay, understood. Thank you very much. Thank you. The next one is from Gokul Hariharan from J.P. Morgan. Go ahead, please. Yeah, hi. Thanks for taking my question. My first question, could you comment a little bit more on the 28 nanometer supply demand situation? You talked about some of the first movers, first wave of customers moving on to advanced nodes. There being a time lag in terms of bringing on second-wave customers. At the same time, seems like there is a fair bit of capacity expansion in Taiwan as well as in China on 28 nanometer. Could you talk a little bit about where you think the 28 nanometer supply-demand balance is achieved? Is it going to take until second half for you to ramp some of your new customers, or do we see this as a one-quarter thing and we see a pickup in Q2? Yeah. Our 28 nanometer process solution, we believe, is positioned very well, especially on our high-k metal gate. UMC is one of the only two gate last high-k metal gate versions providers. Because, especially our high-k metal gate, we improve our process performance. We are now outperforming than the rest of industries, manufacturers. So especially our high-k metal gate, we have a much smaller leakage, which also representing the lowest power consumption. Or we can enjoy a higher speed at the same leakage level. So that makes UMC gain more tractions from our customers on UMC's high-k metal gate process. Though there are some bumpy because of the macro dynamics and demand adjustment, but we believe the 28 will be a very strong and long-life node. UMC is in a very good position to gaining more demand on that. Okay, so this short-term situation, in terms of bringing on some of your second-wave customers, do you expect 28 to start growing in Q2 again, or is it still going to be relatively sluggish in second quarter as well? As I explained, we don't get the second quarter, but based on our customer engagement and demand, we believe that they are very strong bounce back starting from the mid of this year in only 28 nanometers demand. Okay, that's very helpful. My second question is on the gross margin side. Is there some meaningful impact from Xiamen ramp up in the gross margins in Q1? How should we think about gross margins as we go through the year? Are we getting back up to the 20-plus percent territory in second half of the year, or is it going to take a little bit longer as you have a lot of capacity coming online in China? Chinese fab will have impact about 4 percentage point for overall gross margin. However, of course, we will try very hard. The major factors still are pretty much up to our loading and ASP trend. That's still a much bigger factor. Okay. The 4% impact, Chitung, is in Q1 or is it something that will stay through the year as you bring up the Xiamen fab? It's a ballpark figure throughout the year, but we also factor in the 50% ownership of minority interest as well. Yeah. Okay. That's helpful. Thank you. Thank you. The next one is from Sebastian Hou from CLSA. Go ahead, please. Hi, thank you for taking my question. My first one is, I need some clarification from you guys on the first quarter gross profit margin guidance. If we take a look back on the first quarter, if we take out the $1 billion insurance claim, which means your first quarter gross profit margin could have been about 20%, which is nice and I think better than earlier guidance, without the insurance claim. But if you compare that with your first quarter margin guidance, which is about mid-10s, which means that your margin is going to decline by five percentage point. If we consider this, along with your lower revenue contribution from 28 nanometers, which presumably should be carrying lower than corporate average margin. From the product mix perspective, it seems like your margin should trend to a better territory. I'm a little bit confused here. Can you explain more why we see such a large margin decline in first quarter? Well, your assumption is not 100% correct. I mean, 28 nanometer was below our corporate average in terms of gross margin. However, because of the underutilization, the cost of 28 nanometer manufacturing is also becoming higher and the contribution or the earnings strength, if you will, is actually bigger than Q4. Overall, they still drag down our gross margin because of the lower capacity utilization rate in 28 nanometer capacity. Okay. Yeah, I think there is a lot of factors impacting your margins. I think that product mix will probably be just one factor. Thanks for explaining that. The follow on that is, what was your OpEx ratio in first quarter? It should be still similar to that of Q4 last year, but a little bit improvement. Your Q4 last year is about 14%, OpEx yourselves. It will be improvement, probably similar level, but your gross margin guidance is about mid-10s, which means that your first quarter on the operating level pretty much just break even. I am not sure if that assumption Yeah, it looks like the case for Q1, yes. We will try to stay in black. Okay, thank you. My second part of the question is on 28 nanometer. I think the CEO mentioned about the capacity for 28 nanometer this year. Additional capacity will be 6,000 wafer per month. I remember in the past two calls, you mentioned about you were planning to add about 10K to 15K in 2017. So your total 28 capacity will reach 40K to 45K in 2017. It seems like your capacity expansion on 28 is more conservative than earlier. I just wonder what has changed. Actually, nothing changed. I mean, we are having additional 5K in Taiwan and plan five additional 5K in Xiamen, pending or subject to Taiwan government approval. Once we get the approval, that 5,000 capacity will be put into the picture. Okay. Which means your CapEx for this year will probably be raised in the second half or later, just depending on the approval from government. Partially. Part of the equipment, we already been planned, but not executed yet. It's a small portion compared to our overall CapEx. But still, there's a range for the CapEx. Like last year, our budget was $2.2 billion, but we end up spending about $2.8 billion because of the higher or faster schedule in terms of Xiamen expansion. Okay, so you're still on track to build probably minimum 10K of the new capacity on 28 nanometer, just pending approval. Yes. Okay. My third-part question is on the minority, on the P&L. It seems your minority has increased quite a bit in first quarter and along the way in the past few quarters. I assume that's mostly from your 12X fab in Xiamen. I just wonder, can you give us some guidance or hints on how should we model this in first quarter 2017 and also for 2017? Once we inject capital for another 450 million, UMC's holding will increase from 30% to 50%. The minority interest will also come down from 70% to 50% after we complete our capital injection in Q1 this year. Your CapEx, you are also adding more capacity. So the numbers still probably will go higher. You mean- The minority. Minority interest. Yeah. Well, it depends on the result of our Xiamen fab. Right now, it is forecast to be a loss, but we do not have the detailed numbers for the full year. Okay. I have a follow-up on your Xiamen, sorry, the 12X fab. CEO mentioned about 11K of the capacity point by the end of this year. The first part of question on that is that all for 40 nanometers? The first 6,000 wafers is all 40 nanometers. The future expansion, which is ongoing, will be pending on Taiwan government's approval. Oh, okay. That extra 5,000 wafer is 20 nanometer, which we discussed earlier, is good in here. Depends on the government approval, yes. Okay, got it. The last question is on the, I noticed your IDM revenue, or your revenue from IDM customers have declined from total contribution from 12% to 8% and put it in dollar terms is declining by over 30% year-over-year, last year. I wonder, is there any change or, in terms of commitment or what kind of a change you see from I mean, what happened? I would say a part of the reason is because of the industry's consolidation. Some IDM company were acquired by the fabless design companies. Okay We calculate into the fabless design companies. Oh, okay. There is not much change in terms of customer commitment, but mostly due to because of some customer being acquired. Yeah. It's a very significant industry consolidation since 2015. Okay. Thank you. That's all I have. Thank you. Thank you. Ladies and gentlemen, we are running out of time. That will be the end of today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks. Thank you everyone for joining us 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, ladies and gentlemen. That concludes our conference for 4Q 2016. 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 investors events section. You may now disconnect. Goodbye.