Welcome to TSMC's Second Quarter 2014 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the second quarter [technical difficulty] for the third quarter. Afterwards, TSMC's Chairman, Dr. Morris Chang, will provide a couple of key messages, then we will begin the Q&A session where TSMC's two Co-CEOs, Dr. Mark Liu and Dr. C.C. Wei will join Chairman Chang and Ms. Ho in responding to your questions. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to TSMC's CFO, Ms. Lora Ho.

Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will start my presentation with financial highlights for the second quarter followed by the guidance for the third quarter. Second quarter 2014 is a record quarter for TSMC both in revenue and in net income. In this quarter, we saw strong demand for our wafers across all major segments. Our revenue increased 23.5% sequentially and 17% year-over-year to reach NT$183. On the profitability side, gross margin was 49.8%, 2.3 percentage points higher than that in the first quarter. The higher margin was mainly driven by higher capacity utilization, partially offset by inventory valuation adjustments and a small margin dilutive effect from 20 nanometer ramp. Operating margin was 38.6%, up 3.2 percentage points from the first quarter, reflecting an improved operating efficiency for the company. During the second quarter, we recorded a NT$2 billion disposal gain from a sale of Vanguard International Semiconductor Company's share. We also saw a big jump in the corporate tax rate from 10.4 percentage in the first quarter to 19.8 percentage in the second quarter. The 9.4 percentage point increase was attributed to the accrual of retained earning tax, which is incurred in the second quarter every year. We estimate our full year tax rate for 2014 will be about 13%. \Overall, the second quarter EPS was $2.30 and ROE was 26.9%. Let's take a look at the revenue breakdown by application. Our revenue from all major segments increased [technical difficulty] in the second quarter. Compared to the first quarter, communication increased 19%, computer increased 14%, consumer increased 31% and the industrial related revenue increased 25% during the second quarter. By technology, our 28 nanometer grew more than 30% from the previous quarter as contribution to our total increased from 34% in the…

Good afternoon, ladies and gentlemen, I want to make a few comments on the supply chain inventory situation and the second half demand and then a few words on 20 nanometer and the 16 nanometer progress and then a few words on 10 nanometer progress. First, on supply chain inventory and second half demand, our second quarter was record breaking and [technical difficulty] operating income and net income. We have noted in past investor conferences that supply chain inventory dipped to a low point at the end of last year. The past six months have seen a rebuilding or inventory, which partially explains the strength of demand in that period. We estimate that the supply chain inventory has returned to seasonal level at midyear from a very low point at the end of last year to seasonal level at midyear. We further estimate that it will actually continue to build through the third quarter and DOI will be two days above seasonal at the end of third quarter, but then we estimate that the DOI will decrease and will be at two days below seasonal at the end of the year. So last six months have seen a rebuilding of inventory and at midyear, it's above seasonal level. It will continue to build some modestly to two days above seasonal at the end of third quarter and then it will dip to two days below seasonal at the end of fourth quarter; so one might characterize the next six months as a period of cautious inventory management by the supply chain. However, the widespread adoption of 4G LTE tends to increase the demand of our 28 and 20 technologies. Overall, we are guiding third quarter to be another record breaking quarter as Lora just did. It will be another record…

(Operator Instructions) Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate that to English before our management answers your questions. (Operator Instructions)

Here is one already, he is raising...

All right. So, I think Chairman wants Randy, right?

Yeah.

Okay. Crédit Suisse, Randy Abrams. Randy Abrams – Credit Suisse: Thank you. I appreciate you calling me first, I'm sorry to hop – sorry to hop on when - negative with all the results, quite good. I wonder if you could elaborate on your comments on 16-nanometer where you talked about your market share next year being lower than a competitor. If you could talk about why you think that plays-out the potential impact of that and then confidence to regain share like which driving confidence to regain share the following year?

Will you repeat that question?

Sure. Randy's question is with respect to Chairman's comment on 2015 market share at 16-nanometer where we said that we will be lower than a major competitor in 2015. So Randy is asking, why will it will be lower and what is the impact to TSMC if we have a lower market share and what give us the confidence that we will regain the market share in following year?

Okay. Well, we need to go back to history a little bit, 32 - 28-nanometer follow 32-nanometer. And that particular major competitor that I'll refer to chose 32-nanometer and skipped 28-nanometer. And then of course we came to 20-nanometer and 16-nanometer; 16-nanometer for us, 14-nanometer for him. And we chose to do both. Actually we chose to do 21st, hence 16-nanometer about a year or so later but it was a pretty quick succession. And this major competitor skipped 20-nanometer and went on to 16-nanometer. So, you ask why is our market share on 16-nanometer lower than this major competitor in 2015. Well, the answer is, we started it a little late because we chose to do 20-nanometer also and 20-nanometer turned out to be a very, very important node as I already spoke to just a few minutes ago. So, we have both 20-nanometer and 16-nanometer. Now, how can we be sure that we'll regain 16-nanometer share in 2016. Well, the answer is that the technologies these days you just have to engage with the customers way in advance like about two years in advance before you get orders though. You would talk whether you discuss with the customers, the customers follow your tactical progress and then the customers give you tape-outs and you will have to qualify the tape-outs et cetera et cetera. The whole process is about two years in advance of actual delivery, volume delivery. How can I be sure that we'll regain share in 2016? Well, this is middle of 2014 about two years ahead of 2016. I think I have a pretty good idea of how much order I am going to get in 2016. Randy Abrams – Credit Suisse: Shouldn't it impact to TSMC? If you could talk about how material, the revenue impact of that market share because you'll be doing 20-nanometer in high volume, so how much impact, potentially – potential to outgrow in this three year, how much revenue impact from this market share loss in 16-nanometer initially?

Could you repeat that question a little bit?

So, Randy your question is, in 2015 since we'll lose our market share in – at a 16-nanometers, so what's the impact to us in revenue if we do not have that part at the business. Randy Abrams – Credit Suisse: Or ability to outgrow the industry like you have for the past few years. Yeah, either revenue impact or how you see your growth relative to industry?

So, will we be growing faster or slower than the industry next year?

Well, I don't know. I think there is too much unknown still, because we think -- I think I have a pretty good idea of how much revenue our competitor foundry revenue I am talking about, how many foundry revenue our competitor is going to have in 2015 on the 16-nanometer. But I don't think I want to publicly say what the number is. And actually there is still a bit of uncertainty in the number. We could guess some of it, but we are going to be late, but we'll be there actually in the second half.

Randy, maybe we should remind you that Chairman said in his key message that 2015 our 20-nanometer will be accounting for more than 20% of our total wafer revenue. I think that would give us –

I think everybody and Randy understood that and I think everybody also does so. Randy Abrams – Credit Suisse: Okay. Can I ask you the second question? Okay.

That's your, you have three questions.

Yeah, you got two chances already Randy, I think you wait your turn now and later.

Okay. Next question I think would be JPMorgan's, Gokul Hariharan. Gokul Hariharan – JPMorgan: It's Gokul.

Go cool, did you say? Gokul Hariharan – JPMorgan: Gokul.

Okay. All right. Gokul Hariharan – JPMorgan: Thanks for taking question. I had a couple of questions on 10-nanometer. So since you've mentioned that 10-nanometer will start this production in Q4 of next year. Is it fair to assume that 16-nanometer as a leading edge –

I'm sorry, I need to interrupt, did you say that we said before when 10-nanometer... Gokul Hariharan – JPMorgan: I think Chairman you just mentioned that 10-nonometer would start this production in second half of next year?

No, no, no, 16 will start volume production – Gokul Hariharan – JPMorgan: In 2016?

In second half of next year. Gokul Hariharan – JPMorgan: Okay.

I didn’t say anything about 10, don’t misunderstand, that's a very important distinction and the 16. Gokul Hariharan – JPMorgan: Sure. So, just wanted to understand what is the cadence for the 16-nanometer since we are starting a bit later, since 20-nanometer is still going to be more than 20% of revenues next year. Does 16-nanometer also ramp up to be 20% plus of revenues in 2016? Or is it going to be a shorter node and being overtaken by 10-nanometer maybe some time in 2016 or 2017?

[indiscernible] repeat that.

Okay. Gokul's question is with respect to the cadence, first part is with respect to the cadence between 16-nanometer and 10-nanometer, whether or not we will have a shorter cadence or a regular cadence? And whether or not 16-nanometer will account for more than 20% of the revenue for us in 2016 or 16-nanometer will become a short node?

Well, what’s the second question?

The 16-nanometer will account more than 20% of our wafer revenue in 2016 or whether or not 16-nanometer will be very short?

16-nanometer, say it again.

Whether 20-meter will be 20% of revenue by 2016?

2016? I don't think I’ve looked at it. Have you? Well 2016, I don't know what the total – well I think the total revenue will be higher than 2015 but exactly what it will be, I don't quite know. I'm just guessing, I really I have more problem with your question, I have more problem with total revenue of 2016 than I do with the - Gokul Hariharan – JPMorgan: Or if I rephrase it.

16-nanometer revenue in... Gokul Hariharan – JPMorgan: If I could rephrase it, will 16 peak out lower than 20-nanometer?

No. I have a feeling that 16 will be strong or stronger node for us than 20-nanometer. Gokul Hariharan – JPMorgan: Okay. And the second question I have is on.

Can you repeat that, I don't think we have answered your first question. Your first question was 10, was that?

Cadence, the cadence between 16-nanometer and 10-nanometer, whether or not it will be a shorter cadence or?

I just noticed that the Intel said that they are about to talk about their 10-nanometer agenda until sometime next year, all right. So, I'm going to follow that practice okay. Gokul Hariharan – JPMorgan: The second question I had is in terms of capital intensity. I think this year and next year I think capital intensity is already coming down. Should we expect change when it comes to the next leg of investment or is it still going to be the same pattern in terms of capital intensity come down?

Capital intensity is measured by CapEx divided by revenue whether or not this number will be coming down or stays the same.

It will be coming down. Gokul Hariharan – JPMorgan: Okay. Thank you.

Okay. Dan Heyler, the next one from BoA Merrill Lynch.

Thank you. Thank you, Chairman and team. I wanted to follow-up a little bit on again back to the 16 question. It feels a little bit like I remember the CPU days where you’ve had somebody would fall behind on one node and then try to leapfrog and I want to revisit this question of the probability of success in skipping. I know TSMC has been over the year relatively careful at making sure that you are bringing up your technology and learning one thing at a time. So we have double patterning obviously at 20 nanometer and now we have FinFET at 16 and 14 nanometer in addition to two shrinks. Morris Chang:

I am sorry, what three changes are you speaking of?

So we have FinFET double patterning and also you have a couple of note shrinks. So your competitors skipping…

I think we have double patterning and…

Scaling.

Shrink -- scaling,

And scaling.

So what is your confidence that in fact that could be done successfully by your competitor and…

By our competitor I am not going to comment on how successful they will be, so…

You’ve just done that.

I don't think it's going to be easy, but as far as we are concerned, we mentioned three hurdles, to us I think the double patterning will not be a hurdle because we've done that in 20 already. So 16 will not be, but your question was not about us, it was about our competitor right and I don't think I really want to comment on that except to say that it's not going to be easy.

Yeah, well, I think you are commenting already by saying you are going to lose share, so I just wanted to get a feel, it may be flex to say I think it's important for an investor standpoint to understand the complexity and doing this. I think now you are pretty much down the road in 20 nanometer. I think here you see in market had a good look at 20, you’ve looked at the challenges in bringing up double patterning, how critical is 20 as a learning node?

How critical is 20 as a learning aid? [Technical difficulty] It's not working, yes.

And you have a team observation.

I think indeed I haven’t seen industry skip nodes to be as successful if not still catching up, but we never underestimate our competitors. So I wouldn’t want to comment, but it is every change of each generation is very difficult. Therefore, you see the skilled technology definition. They change one thing at a time as you know. So that says most of it for the people trying to catch up that's what they do, but historic, there is lot of history historical data you can see.

Thank you. Second question, the cadence, R&D, I've been impressed by your operating efficiencies Lora, with this 16 acceleration, 10 looks pretty aggressive, should we be modelling R&D pick up growing at a faster rate than sales or will maintain as a percentage of sales over the next two to three years?

Let me answer. If you are asking whether our R&D will build up even faster than revenue, is that right? I think that it's possible. In fact that’s really our first priority. I think we want to strengthen our technical side even more. But it’s not going to be very big. Right now actually we modeled on the 8% of revenue at the beginning of the year. Now, the revenue has turned out to be bigger than we thought it was going to be. So, right now R&D is only 7.3% of revenue. And in my mind however the model is still eight, all right?

Thank you.

Next question will come from the floor. It will be Citi’s, Roland Shu.

Hi, good afternoon Chairman. I think I just first still a follow up question 16 nanometer. I believe Chairman comment in AGM that 16 is ahead of competitors 14-nanometer in three regard, first is technology and productivity and also trust of customers. I think for the productivity and trust of customer, actually have we have note of outlet, so can Chairman quantify that how big the lead it is for your 16-nanometer FinFET to competitor's 14-nanometer FinFET? Thank you.

Actually I intended to repeat what I said in the General, Annual General Meeting just now. Really if you combine the three, speed, density and power, we feel that we are more than, how bigger lead we have etcetera etcetera. Well, I think that will be a very difficult question to answer because our competitors on the 16 are the two companies that I in the past referred to as the two big gorillas of the industry and each has its strengths; so the two are not the same at all. And each has its strength, each has its weaknesses and a competitor maybe technologically strong, but if it turns out to be a competitor of his potential customers then that’s a weakness. And if a competitor is already used to being both a competitor and a supplier, but he has got technology weaknesses, now that’s a problem too for him. While I don’t think I can really answer your question in a very simple way. I can only answer by just repeating what I said earlier combining performance, density and speed -- speed, density and power, we believe we are more than competitive. And in terms of the ability to get business, we believe we are more than competitive, okay.

Thank you, Chairman. I think my second question is for near term for the 3Q. The revenue guidance now is up 12% to 14%. But the 20-nanometer itself probably be -- account to be more than 10%, so let me -- now 20 nanometer revenue growth in 3Q probably will be below seasonality, so is this any reason behind it or is it just because of the capacity constraint for the now 20 nanometer revenue. Thank you.

So Roland's question is with respect with third quarter, since our guidance of the third quarter sequential growth spread is 12.6% to 14.2% [technical difficulty] rate is going to a lot faster, which means the non-20 nanometer geometry growth rate will be slower and so while what's the reason behind the slower growth rate in other nodes, is it because of capacity constraint or some other reasons.

Randy – Roland, Chairman's comments second half will go through an inventory depletion cycle again, so that actually has some impact on third quarter and fourth quarter, so it's not the capacity constraint, issue is overall inventory level going into the third and fourth quarter. Roland Shu – Citigroup Global Markets: Okay. Then do you see any specific segment that have biggest inventory correction issue into the second half. Thank you.

I don't want to comment, actually I don't have information on DOI on specific segment, but based on my guidance I just gave your earlier, we are seeing very strong growth in communication in the third quarter. However, on a computer and consumer will be declined segment. Industrial and various product will have a modest growth as well. Roland Shu – Citigroup Global Markets: Thank you.

Okay. We'll now take our next question from the call. Operator please proceed with the first caller from the line.

Thank you. Your first question comes from Steven Pelayo from HSBC. Please ask the question. Steven Pelayo – HSBC: Yes, I apologize a bit for the line. Your 20 nanometer ramp is very impressive, very steep, revenues excluding 20 nanometer is going to 10% of revenues in more than 20% of revenues in the fourth quarter, it kind of suggests rather a meaningful growth for the industry in the third quarter and a pretty sizable down in the fourth quarter, so what do you think the industry is doing or do you think that may be 28 nanometer and I think investors are starting to have an impact, just to augment and think about your revenue excluding 20 nanometer is that really what's driving so much of your growth in the second half of the year?

So Steven's question is very similar to Roland's question earlier in the sense that if we take out the 20 nanometer than our third and fourth quarter growth doesn’t look so impressive, is that because of competitions heating up at 28 nanometer or is it because of some other reasons?

Well. I really -- I guess if we take out I think the rest of it if you take out 20 nanometer, I am just calculating in my head right now, if you take out 20 nanometers, we have growth in the third and fourth quarter, I think we still have growth. We have growth and fourth quarter we'll have growth in the fourth quarter about fourth quarter total fourth quarter yet I am just mentally calculating what it look like if we take out 20 in the fourth quarter and as of my mental calculations we still have little growth yes, I don't know how little is little. It may not be too little. Yes, we still have growth, but I think just as Lora has said we are -- and I also said in my opening remarks that the inventory will be cautiously managed. It almost always is toward the end of the year. Last year in fact it went overboard, the caution went overboard and as a result we had a pretty bad fourth quarter and a lot of people had a pretty bad fourth quarter, only to recover in the first half of this year and we are predicting as I said earlier, that inventory will be very cautiously managed and of course we'll tell you again three months from now what it looks like at that point, but just space out the numbers, we have already given up I would say that, yes, even if you take out 20, we'll still grow [technical difficulty] and we'll still have growth in the fourth. And that's already -- that is already taking into account the cautious inventory management that happened in the second half of this year. Steven Pelayo – HSBC: Okay. Great, maybe just one quick question for Lora, I know this from the management report, you no longer were breaking out depreciation within cost of goods sold, I think you guided for total depreciation of growth I think it's 30% or 35% this year, could you just remind us what it was within cost of goods sold for the second quarter and now within the third quarter?

Okay. We have a chart in the later page, the last page of management report that [technical difficulty] quarter will be NT$45.9 billion will go up very steeply in third and fourth quarter. For the whole year, we still expect the year-over-year depreciation will be 33% growth, which is lower than what I have told you in the past. Steven Pelayo – HSBC: Okay. Slightly lower and just as we try to quantify how much -- where does it step up to in the third quarter?

You mean from second quarter to the third quarter, how much is the depreciation increase? Okay. the third quarter… Steven Pelayo – HSBC: Yes, what depreciation growth that contains?

All right. Third quarter will be NT$59.5 billion depreciation. Steven Pelayo – HSBC: NT$59.5 billion, okay. Great. Thank you very much.

So the next question, come back to the floor, it will be coming from Barclays, Andrew Lu. Andrew Lu – Barclays Capital: Morris Chang, I have a question for you. Regarding the market share on the 16 nanometer you mentioned earlier, next year we might have a lower share compared to that, can we use something to describe it, next year do you see what market for this FinFET is large like this year, like a 20 nanometer, or much smaller as either this one or the second one, we might lose shares because our 20 nanometer customer switch to competitor using 14 nanometer and that's why we're losing share, but not using our 16 nanometer. Just to ensure we'll have a traumatic difference for the company's earnings prospect.

Company's earnings. Andrew Lu – Barclays Capital: The first one is for example this year, we have a 50-K 20 nanometer capacity by the end this year and that will be partly…

I am trying to follow your questions, but let -- first let Elizabeth, did you get the question. I think I got. Andrew Lu – Barclays Capital: The first question is two choices. Two choice only, not much.

Andrew, your question is you want to know the overall size of the 16/14 nanometer business, overall size of the business in 2015, whether or not that is bigger or smaller than the 20 nanometer size of 2014. Andrew Lu – Barclays Capital: That's correct.

That's your first question. Andrew Lu – Barclays Capital: So is that our shares losing because of adjustable market is much smaller than…

Okay. I think [technical difficulty] if you look at 2015, our 20 and our some 16 is much bigger than the share, is much bigger than the 16.

I think his question is this total 16 foundry market next year is it as big as the total 20 this year, is that your question? Andrew Lu – Barclays Capital: Yes.

I think it's smaller.

Smaller. Andrew Lu – Barclays Capital: The total [technical difficulty] FinFET including 16, 14 FinFET for others yes.

Comparable, but we're losing share.

Losing share. Well, that's what I said. The zero FinFET share this year for either party right. Next year we will have a lower 16 share than a major competitor, that's what I said. Andrew Lu – Barclays Capital: So my question is whether this losing shares because our 20 customer move to competitor for 14 or this is a brand new demand which you chose competitors 14 nanometer first.

I don't think there is a rule, we are not going to comment on specific customers all right. Andrew Lu – Barclays Capital: I did not mention any customers.

You said because one. Andrew Lu – Barclays Capital: One important customer.

One important…

Are you asking because they switch from 20 to 16? Andrew Lu – Barclays Capital: Yes, yes, 20 to 14.

Because somebody switches from 20 to 16 and therefore we lose share, no. Andrew Lu – Barclays Capital: Thank you.

At least not primarily.

All right. Next question will be coming from Goldman Sachs, Donald Lu. Donald Lu – Goldman Sachs: Good afternoon, Chairman. I think it's catching quite.

We don't have reserve competitors. Let's look at the total. I just look at ours. Donald Lu – Goldman Sachs: Yes, I think may be let's just look at the total -- this total foundry market share. I think last year you said, you'll gain 4%, this year based on your guidance you're gaining may be more than 4%. How about next year?

Yes, I think we'll at least stay there. After gaining almost 10 points, 4% or not by 10 points, four points last year, several this year, that's more than half way to a 10 point gain in two years and I think we'll stay there at least. So just as you said Donald, it doesn’t have to be very complicated once you think about the basics yes. Donald Lu – Goldman Sachs: Okay. So next year I guess obviously will at least maintain market share in the whole foundry market.

Yes, next year what? Donald Lu – Goldman Sachs: Sorry, just rephrasing your words, you said next year we'll at least maintain your foundry -- total foundry market share next year.

Next year, yes. Well at least we're going to. At least -- we'll do everything we can to actually inch forward a little. Donald Lu – Goldman Sachs: Okay. Great. My next question…

And remember actually the looming battle is really not 16, in my mind, the 16 battle has already been fought and the looming battle with and I don't know what the outcome will come of that battle will be. I don't know anything about it today, but before I came here today and as I leave here to go back to the office today, my thought primarily on the 10, not so much on the 16. The 16 you know is -- just as somebody said [Wellington, I think, the fellow] (ph) was one on the plane of [Eaton] (ph) and I have already [indiscernible] and I can already foresee the results on the 16, the 10, I am still in [Eaton] (ph), okay. Donald Lu – Goldman Sachs: So I guess share is slight what are you thinking about 10, like what's the key issues may be focus on.

Would you repeat? Donald Lu – Goldman Sachs: My question is on 10 nanometer, you said, you are thinking before and after the conference, so maybe you can share this like what you are seeing, what are the key points that we should look out for the 10 nanometer progress as well?

So Donald's question is what is in Chairman's mind regarding 10 nanometer?

What is in my mind regarding 10 nanometer.

…10 nanometer?

One or two. He knows what is in my mind.

I think I know -- we reported is in TSMC and at this time our 10 nanometer is very competitive and as Chairman just mentioned then -- particularly intensity that will be back on the historical trend, even better, but most importantly is we have a few customer embrace this technology and also the timing or leading customer even plan to collaborate with us to do their product tape out before we qualified the technology. Therefore we see there is a strong market demand for the 10 at this point. So we are very excited about this new technology definition. We are all very excited about our customer partnership of this 10 nanometer and we are really full steam to develop this. Donald Lu – Goldman Sachs: Yes, can I have another question here? My other question is more on the margin side, maybe we can Lora can explain to us like you commented that in Q2 there is inventory adjustment and also a 20 nanometer ramp up cost, what's the total margin impact there?

Second quarter gross margin.

I do want to go back a bit on the I think someone from here asked a question about capital intensity will go down and at that time they didn’t mention that it will go down, but I was just checking with Lora because I remember and I think there is a chance that next year actually may put up a little bit, but not significantly. This year that the general trend is very definitely downwards. We're already over the hill this year. This year we'll be spending about less than NT$10 billion or little less and last year we spent what…

NT$9.7.

NT$9.6, NT$9.6, our revenue last year was let's say that our revenue this year is 20 some percent greater than last year and the same capital spent -- who asked the question by the way? Right, so our capital expenditure this year is about the same as last year and yet our revenue this year is 20 some percent higher than last year. So I expect the total trend to be coming down. However, next year, we may see a little aberration a little one, but things will be for you again in 2016 on the 16 nanometer, probably we need to spend a little more capital.

Chairman, can I make some comments on that?

Sure.

Chairman, say that next year maybe our capital intensity will be slightly higher than this year, but it's very safe to say it will be much lower than 2013.

Yes, 2013, I think…

It was 48%.

Yes. Yes.

But Lora, Donald still has a question for you on the margin of the second quarter. How much is the impact from inventory?

I am sorry, did I interrupt something actually? Okay. Please, please, yes.

It was the inventory readjustment and ramp up of 20 nanometer impact to the second quarter margin.

We'll talk about the 20 nanometer impact first. In the second quarter, we have very, very small shipments, but we have incurred some cost already. So the impact to margin is about 1% to your point, okay, that's for 20 nanometer. For inventory adjustment, it's more than 1%, but below 2%.

All right. Next question will be from UBS, William Dong. William Dong – UBS: Good afternoon, Mr. Chairman. I guess we keep talking about technology, I guess the question I want to ask is that with all this rush to continue push down technology roadmap to go down to 16 to 14 and to 10 nanometer, what are our thoughts with driving this demand. As we move towards for example internal things, is there such a requirement to keep pushing on the technology front to actually have enough sufficient demand to keep driving it down?

Well, if the cost is low enough, cost is very much part of the equation. If the cost is low enough, the demand will increase because we can see a lot of applications that are just waiting there. Of course I am talking about the mobile products, but I am also talking about internal things variables and the so on, so on internal things. The applications are just waiting there for faster speed and lower power and higher density. I see cost is density in the equation, so yes, so when you ask will the demand be there, if we can get the cost down to an acceptable level, demand will be there and of course that's why, that's how things like EUV come into question. Nobody has asked about that yet. We actually will prepare to answer that with the same answer that we gave you last time by the way that we're still planning to -- it's still a possibility to use EUV on one or two or just layer in the 10 nanometer, yes, one layer in 10 nanometer and seven I think is of course even better candidate. William Dong – UBS: Okay. Thank you for that. So it's good to hear that EUVs will be potentially used.

EUV and we're trying -- we're working very hard with a lot of other people, ASML and other equipment vendors to reduce the patterning cost of optical emersion lithography and we're also trying very hard to reduce the cost or run as much as the lithography, but or other costs. William Dong – UBS: Okay. Thank you and one more question is as we look at earnings continues to improve and obvious expectation will continue to rise, what are thoughts about potentially having more cash dividend as we move forward in time because right now we've been staying around $3 for last few years, but as we generate more and more profit, the cash flow improves, how likely is that to happen, or the cash dividend to rise?

What?

As our earnings continue to improve, will we also increase our dividends?

Dividend, it will be seriously considered, an increase will be seriously considered. William Dong – UBS: Okay. Thank you.

We do have about NT$7 billion worth of bonds that we have to repay right, but certainly an increase in dividend will be seriously considered.

Okay. I think we need to go back to the line for the next caller on the line. Operator, please proceed.

Thank you. Your next question comes from the line of Mehdi Hosseini from SIG. please ask your question. Mehdi Hosseini – SIG: Yes thanks for taking my question. Dr. Chang, going back to your commentary about 10 nanometer and how the parts have been available in second half of 2015 and that's where you're going to start ramping 16 nanometer, so in contest of your major customers, why do they want to switch from 20 to 16 and why not just skip 16 and just go directly to 10 and I have a follow-up?

All right, Mehdi your question is with respect to what we said earlier about having 10 nanometer customer product tape out available in 2016? Well I think we said second half of 2015, not 2016 and then your question is whether or not we see customer skipping 16 nanometer and going from 20 nanometer to 10 nanometer is that your question?

Yes, that's correct. Thank you.

No, those customers -- those customers are not skipping 16. I think there are segments of application is driven by the integration and possibly lower power also together to drive this technology, but that's only a particular segment. That doesn’t mean that driving a technology faster, the previous note will be assured lived is not because the market application is spreading, spreading up. Some of the segments continue to drive the leading edge, but there are a lot of segment applications that stay on the older notes. So it's not a one move to the next node will be either is not the case. So we just see this migration fuel the semiconductor growth in those applications. Mehdi Hosseini – SIG: Okay. Thank you. And the follow-up is a clarification, the cash flow intentionally may increase next year, but the bond value of CapEx remaining the same will go up in 2015 compared to 2014.

Mehdi, your question is if our capital intensity ratio will go up a little bit in 2015, does that mean that our revenue will go up in 2015, is that your question? Sorry, can you repeat that? Mehdi Hosseini – SIG: And more so, should we assume including the last conference call there was a comment that CapEx in 2015 will be similar to 2014 is that essentially sustained or should we assume that CapEx may actually go higher in 2015?

Okay. So well, the comment of higher capital intensity in 2015 means higher CapEx in 2015. Sure. Mehdi Hosseini – SIG: Yes, thank you.

Okay, now coming back to the floor and next question will be coming from Deutsche Bank, Michael Chou. Michael Chou – Deutsche Bank: Hi Chairman, one question for inflow, do you expect any inflow revenue next year?

What do you mean by inflow? Michael Chou – Deutsche Bank: Inflow.

Inflow, okay.

C.C. will answer that question.

No, not yet. Michael Chou – Deutsche Bank: The second question is regarding the 10 nanometer, do you think the 10 nanometer total more like -- would be still bigger than 16-14 or similar? Thank you.

Well, 10 nanometer market will be similar to 16-14. I would be just guessing. I would just be speculating, but if you talk about dollars, it think it will be more. If you are talking about wafers, I think it will be either similar or may be a little less. Again, I am speculating with you all right because a lot depends on what cost we can come down to.

All right. Follow-up question from Dan Heyler, Bank of America Merrill Lynch. Daniel Heyler – Bank of America Merrill Lynch: Hopefully this question simplifies and doesn’t complicate things. Just to make sure I understand this share loss thing. So basic of what you are saying is the share loss at 16, these are customers that are choosing to skip 20, is that how should I think of this that these are not any -- are any of these customers, customers that are currently 20 that are going to 16 next year or is this all people that are choosing to skip 20?

Well, first of all I want to question the word share loss okay. I don't consider a share loss because just like 32-28, we had zero share in 32, but then we were very successful in 28. The two really belong to the same generation and 20 and 16 also belong to the same generation. So yes, and share loss means that you start with something and then you would lose it, it becomes less. Well, this year nobody has -- everybody has zero share okay and I am just saying that we'll stop on 16. we'll start with a lower share than we had with 20 or 28. We'll start with a lower share than we did with 20 or 28 and we'll get back to a high share in 2016 and thus arguing with him, but he did have a question, what was that?

So what is your question? Daniel Heyler – Bank of America Merrill Lynch: The 20, it was a simple question, the 16…

Okay. Yes, I remember, Dan's question is this lower share that we will have at 16 in 2015, is it due to a customer's… Daniel Heyler – Bank of America Merrill Lynch: Or just simply are your -- are these customers moving to 16? Are these ones that have currently been on 20 or these are guys that are skipping because of the debate in the industry is should we go straight to 16 and skip 20, so are these customers that are basically have been at 28 and are skipping 20 and going straight to 14 your competitor.

Why do we start with lower share? Well, because mainly because are you listening to me Dan, I am trying to answer your question.

Yes, Dan you have to listen carefully. Daniel Heyler – Bank of America Merrill Lynch: Yes, I am listening.

Mainly because our customers want it sooner. We got a little last as I said. Our customers want it sooner. So that's why we're starting and we catch up only little later. Daniel Heyler – Bank of America Merrill Lynch: Very clear. Thank you.

I think we have a follow-up question on the call. Operator, could you please proceed to the next caller?

Thank you. Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question. Steven Pelayo – HSBC: Great. Thanks again for letting me come back for another question. I am curious about customer concentration. In your filing you had one customer I think 22% or 23% of revenues seems like you're ramping I think another significant customer, I am curious if you think about may be just your top five customer in 2015 let's say next year, it seems to me that those could may be even as much as 45%, 50% of revenue, do you think that's possible and do you have any concerns about increasing customer concentration?

So Steven you're asking us about the customer concentration in 2015 and whether or not the top five customer that we will have in 2015, will account for about 45% or 50% of the total? Steven Pelayo – HSBC: Let's say you have to do that in 2015, but I mean even the second half of this year, it seems like you are going to be ramping up pretty significantly now that customer would seem that your top or five customers are going to be at very large amount.

So the customer concentration starting second half of this year that our top customers will have a very large share of our revenue.

Is the customer concentration going to change, is that the question?

Is bigger? Steven Pelayo – HSBC: It seems like the concentration -- customer concentration is increasing going forward, last year you involved in your filing one customer had 22% of revenue, I think you have another customer that's ramping up very significantly now and then may be a couple other one where it would suggest to me that they need their top four, five customers are either 50% of revenue, does that [indiscernible] decreasing do you install the risk of higher concentration, concentrating customer base?

Well, as we talk about the top five customers, I think that the top -- our top five customers have always had 40%, 50% of the revenue. Steven Pelayo – HSBC: Okay.

Now -- but something has changed in the last couple of years, but to detect the change, you have to ask about the top three customers as their concentration change. The top three customers concentration has changed, but I will see it changing very much from this point, which is the second half of 2014, in the next 18 months through the end of next year, I think the top three customer concentration is going to stay about the same. Steven Pelayo – HSBC: Okay. Thank you. One final question for me, I am curious just about -- you're pretty forward on your view from actual end demand, but the data points on demand in the first half of the year maybe do you see a little bit better than expected on in the light to win next three, but in general somebody that came out in TV, the smartphones, what impact could and there is a lot of expectations that this 4G ramp in the second half of the year. I am curious what signal do you have or confidence than that in demand will be robust and that to support so much my opinion undifferentiated four to six inch smartphones out there.

Steven's comment was that it doesn’t appear to him I guess that the smartphone demand in the second half will be that strong, so what will leave the smartphone demand in the second half will be that strong? Steven Pelayo – HSBC: You are already saying that data points thus far have been disappointing, so we need a pretty big ramp in the second half of the year?

We have some numbers also that he believes the smartphone demand will not be so strong and therefore…

So what drives the business growth in the second half?

What drives the business growth? Well I guess we have the orders already, don't we, as far as third quarter is concerned and the fourth quarter we have some orders also. Well I think maybe…

Yes, I think Chairman did mention the second half will go through some mild inventory correction, however because of the power share on 28 and 20 nanometer prompt us to have a stable trend. Steven Pelayo – HSBC: Thank you.

Coming back to the floor, there is follow-up questions from Barclays, Andrew Lu. Andrew Lu – Barclays Capital: Dr. Chang and Lora, I remember January conference when the Q1 utilization and [lower] (ph) build the inventory for customer, but leaving some of the inventory while being taken out, so second quarter seems doing very well, this new strategy, assuming Q1 next year we have kind of a larger decline because customer have an adjustment inventory, while we do the same thing in Q1 next year and to sell the…

I am glad you praised us a very good strategy, I've also too. I was the author of that strategy all right. I thought so too, but it wasn’t necessary for too long because very quickly our inventory building program was overtaken by customer demand. Andrew Lu – Barclays Capital: So while we build more this time compared to this year, still kind of conservative learning than…

Utilization is 100% just to respond to customer's demand. You have no -- you have no capacity to build inventory. That's what happened when I said that, that program wasn’t necessary for too long. We didn’t have the capacity any more after I guess since what March. So that program was in place, inventory building program -- inventory building meant anticipating orders, not having orders and building inventory. That's what it means, but and that was the case I guess in the fourth quarter last year and in January and February and then from March on we began to be flooded by orders. So there was no… Andrew Lu – Barclays Capital: No inventory.

No capacity to build inventory with. Order capacity had to be devoted to building orders -- to building to orders. Andrew Lu – Barclays Capital: My second question very quick, earlier Dr. Chang mentioned ramp up on the 16 starting from end of the next year and change it to second half next year, so can we just have a clear picture of what kind of revenue contribution will be by Q4 next year from 16 nanometer? Thank you.

So how much will 16 nanometer account for our fourth quarter revenue in 2015, how much will 16 nanometer account for?

16 accounts for…

Our revenue in 4Q next year?

How much is…

How much will…

For the year and yes.

16 nanometer in fourth quarter 2015?

That's your question? Do you want to answer? Okay. Lora yes.

We'll start mass production of 15 nanometer from third quarter next year, while it's bit too early to tell you the percentage of revenue contribution, but we believe it will be a single digit range okay.

Okay. Follow-up question from Deutsche Bank's, Michael Chou. Michael Chou – Deutsche Bank: Chairman, regarding the 16, 20 nanometer, could we say your total market share in 16 and 20 nanometer will be similar to 28, 32 for the corresponding period, can we say that?

Say it again.

Combined 20 nanometer and 16 nanometer, our market share, will that be similar to the combined 32, 28 nanometer market share?

The combined 20 -- I just ran an analysis just couple of weeks ago, so I know exactly the answer to your question. The combined 20, 16 market share in the first two years of its existence, which is this year and next year will I guess I have to add in 2016. The combined -- our combined 20, 16 share in 2014, 2015 and 2016 is still be greater than our combined share of 32 and 28 in -- is it 2011 or 2012?

2012, 2013 and 2014.

Well 2012, 2013 and 2014. Michael Chou – Deutsche Bank: Thank you.

Great. All right. In the interest of time, I am just going to allow the very last one and that's Credit Suisse, Randy. Randy Abrams – Credit Suisse: Thank you. This one might be more for Lora. Just wanted to ask on 20 nanometer the forward look, how much impact on margin, how long it might take to reach corporate average and if you could do an initial look on structural profitability and depreciation for next year?

Okay. I'll just talk about the second quarter the 20 nanometer has about one percentage point impact to corporate gross margin. As we're ramping very fast in the third and fourth quarter, the impact will be larger. Based on my current number, it will be ranging from three to four percentage points in the second half of this year. Next year it will be 1% or 2% roughly okay. When to reach a corporate average I think it usually takes seven to eight quarters, so it will be in 2016, I don't know which quarter yet okay. And you asked about depreciation as well? Randy Abrams – Credit Suisse: Yes.

We have not finalized our CapEx for 2015. I think the magnitude of year over increase will be much, much smaller than the 33% this year. So I don't have a firm number yet.