聯華電子 (UMC) 2002 Q3 法說會逐字稿

Good day and welcome to the UMC third quarter conference call. Please be aware that each of your lines are in the listen-only mode. At the conclusion of the presentation, there will be plenty of time for question and answer session. At that time, instructions will be given to the procedures to follow if you would like to ask a question. Today's presentation will be available for replay at 11:00 a.m. Eastern time through November 5th at midnight. You may access the replay by dialing international 719-457-0820. For the U.S., 888-203-1112 and entering the pass code 559983. Again, international, 719-457-0820, or toll free, 888-203-1112, and the pass code, 559983. At this time, I'd like to turn the conference over to Mr. Ing Da Liu, Director of Investor Relations at UMC.

Thank you, Bill. Welcome and thanks very much for attending our third quarter earnings conference call. We are hosting it from Taipei. Here to help with the positive results are Mr. Peter Chang, vice chairman and Mr. Stan Holmes, CFO.

Before beginning this presentation, I would like to remind everyone that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on management's current expectation and belief and are subject to a number of risks and uncertainties that could cause actual results to differ materially that may be beyond the company's control. Please refer to UMC's filing with the sec in the U.S. and the RFC security authorities. I would like to turn the call now to today's speaker, Mr. Peter Chang, Vice Chairman of UMC. Peter, please?

Thank you, Ing-Da. Good day, everyone. Thank you again for joining us today. As always, we appreciate your interest in UMC. We are here today to report UMC's results for the third quarter. We are happy to say that UMC are able to deliver solid sequential growth again. While the outlook for the global semiconductor market has been gloomy, these positive results continue to be on our efforts on winning new customers as well as developing the leading-edge technology.

We here at UMC remain optimistic about our business model and we are confident that we are -- we will remain a leading developer of new technology and an essential player in the global Foundry business. I would like to begin with a brief summary of some highlights from the third quarter of year 2002. And then open the floor up for questions. Since you would have all seen the third quarter earning release, I will briefly cover some highlights from the quarter. Key points from our regular investor's meeting in Taipei a few hours ago, and then we will leave the rest of the time for your questions. First of all, we are all pleased with the improvement in the sequential and quarter over quarter top line revenue growth. While we have anticipated that this quarter to be somewhat flat or only a marginally growth in our last quarterly conference call, the global semi conductor market became even weaker over the last few months. We were extremely pleased to see that in the end our sales performance for the quarter was able to top what we had originally anticipated.

This strength are mainly driven by the sales of the higher asp, leading edge advanced process technology. The point is, the 3.1% sequential top line revenue growth are principally due to the new customers and demand for new leading edge technology. For example, there are a 60% increase in revenue from higher asp .18 micron and below advanced process technologies. Wireless communications customers wins drove the increase in the North America revenue to 43% of total revenues. Asia Pacific revenue drops to 34% of total revenue because of the inventory rationalization at several Asian customers.

The growth should be driven by 130 millimeter sales following a ramp up of new customer products. Also, we currently have the largest 300 millimeter wafer capacity of any Foundry. We are one of the largest shippers of 300 millimeter wafers for logic ics. The 11.2% sequential decline in the gross profit was mainly due to the lower loading and increased costs due to the ramp up of 12-a, our main 300 millimeter. The 32.3% sequential decline in operating expenses related to the 440 million net decrease in R&D expenditures. That was mainly due to the completion of a joint development project with IBM on .13 micron technology.

Net operation income from third quarter of '02 was 1175 million NT, which including a 306 million NT contribution from investment income and a gain of 70 million NT related to foreign exchange. The sequential decline in the net income was mainly the result of lower gain from the disposal of investments. Earnings for ordinary shares for the quarter was .10 NT. Earning for abs were .014 U.S. dollars. This compared to a loss per ordinary shares for the equivalent quarter last year of .30 NT dollars or a loss per ads of .040 U.S. dollars. Going forward, we remain optimistic for the long-term outlook for our business.

The weakening market should be an opportunity for us to gain more of IBM's customers. We're looking to increase the amount of their outsourcing. In the coming quarter, we are expecting the average selling price on wafer to be down 3% to 5%, a declining of approximately 7% in wafer shipment. Capacity utilization rate to be in the high 50% range. Operating profit margin to approach the break-even elbow. Percentage of revenue for .18 micron or below technology to moderately increase to approximately 40%. In term of Kapax, we are expecting to spending 800 million of U.S. dollars of capital expenditure for the full 2002 fiscal year. This is down from the $1.3 billion U.S., that was forecasted in the Q2 year 2002. The distribution of the 800 million U.S. Kapax is approximately 40% on a 300 millimeter capacity and 30% each of R&D and 8 inch capacity upgrade. In conclusion, before starting the question and answer session, I would like to highlight several key methods.

Number one, UMC is pleased to top the third quarter guidance and continue to deliver operating growth despite the weakening semi conductor market outlook. Our asp has recovered to the U.S. 1,300 level after the two consecutive quarters of strong growth. We enjoy strong .13 micron demand with nearly full capacity utilization rate. [INAUDIBLE] rates have been shown to make a breakthrough and sales from .13 is expected to be more than 5% in Q4, year 2002. We also expect continuous growth in .13 micron revenue.

We are forecasting that in the year 2003 revenue, we'll be at least about 15% of revenue will come from this .13 micron technology. UMC is the Foundry with the largest 300 millimeter capacity and we have achieved better yield than that of 8 inch facility. We react rapidly to the changing market by cutting the capital expenditure further down to 800 million U.S. dollars. We are watching the economic situation to make the necessary change. Management remains optimistic about the health of our long-term business models. Now let me turn the call back to Ing-Da.

Thank you, Peter. And we are ready now to start the question and answer session, please.

Thank you, Mr. Liu. The question and answer session will be conducted electronically. If you would like to ask a question when you may do so by pressing the star key followed by the digit 1 on your touch tone phone. If you are on speaker phone, please be sure your mute function is turned off to allow the signal to reach our equipment. We will proceed in the order that you signal and we'll take as many questions as time permits. Once again that is star one to ask a question. We'll pause a moment to assemble our roster. Our first question comes from Mohammed Shawn, JP Morgan. [ inaudible ] Mr. Shawn, your line is open, sir. [ inaudible ] We'll go next to Mike O'Brien, Soundview Tech Group.

Yes, hi. Good morning. Um, could you just give me, um, any commentary you may have first on 2003 capital spending and also what percentage of your capacity is .13 micron capable by year end?

About the first question, at this time, we don't have any forecast yet on the year 2003 capital expenditure because the market situation is not very clear, but we are sure the delivery time is very short. So any upturn situation we could react very quickly. As far as the second question about the capacity of .13 micron, and we estimated 8% in the year 2002. And about in the next year, 2003, we estimated about 20% capacity belongs to .13 micron.

Okay. And just can you talk a little bit on maybe the end markets for 2000 for the fourth quarter where you are seeing strength? Is computer looking weaker and on the communications side, seems like there was some commentary that wireless land was stronger. How about wireless hand sets?

Yes. We have seen Q4 situation is pretty much the trend as Q3. We've seen continuous strong on the wireless communication. The revenue will be a little bit higher or flat, but we see the weak being on the pc, the weakest sector of 3-c hits the pc industry. We also see some declining on the consumer sectors.

Okay. Great. Thank you.

Our next question comes from Dan Hylar, Merrill Lynch.

Good evening. Hi, guys. I have a few questions. First on the capital spending on the UMC group, has that changed other than UMC core Cap Ex? Were there other changes that you know of from the affiliate companies?

Okay. The capital expenditure for the UMC J is remaining $100 million U.S. dollars and then the UMC I is also $100 million U.S. dollars.

Okay, great.

And on the IBM business, you mentioned that wireless could still be strong. Would you expect any kind of end product mix amongst the IBM business or would you expect that the product mix in the fourth quarter as well as the first quarter would remain roughly about the same? Because you indicated IBM's, you thought would be roughly five up in the fourth quarter. Is that essentially the same product mix or new products coming in?

We pretty much feel that it's about the same trend with all of the IBM's. The first and fourth quarter is all the same.

Okay, great. And then with regard to your Cap Ex number, reduction of 800 million, that's from 1.3, but you were kind of hinting at, you know, 1 billion or so roughly. So does the difference of 200 million to say 400 million you were thinking about in the fourth quarter, does that get spent in the fourth quarter? Is that merely a push out or is that a cancellation?

You are talking about UMC's capital expenditure?

Yes, UMC.

It's on the 800 million at this moment to the end of this year. At this -- most of the money will already be already issued.

Most of the 1.3 or most --

Most of the 800 million.

I see. Okay, so you don't have essentially pending pl's that will get delivered in the first quarter?

No, it's already there.

Okay, great. And then the last question was on your comment about 0.13 potentially being 5% of revenue in 2003.

Mm-hmm.

How do you go about thinking --

That's not correct. Let me correct your statement. 5% plus is the Q4 for this year.

Yep.

We're talking about year 2003. We have a 15% plus.

Correct. Oh, did I say '02? I meant '03. Okay, 15% of total revenue for '03. How do you go about thinking about that number that's forecast? Is that based on existing products that you think will convert over or is that based on new products?

Some of it is the product right now are ready to take off. Some of the spaces that we got from market from our customers. Especially for year 2003. Q4, the confident level this year is high.

Yeah, at 5% roughly of revenues.

Yes. 5%.

Okay. So it sounds as though 5% to 15% of revenue doesn't seem like an aggressive forecast. Do you think that potentially it's demand strong in the second half what the upside of that number would be?

It is very difficult at that time to give a very precise forecast, but that's, as you know that UMC in general in this area, we like to do as accurate as we can.

Fair enough.

At this moment, we're only committed on 15% plus.

Fair enough. Thanks a lot.

Okay, thank you.

Our next question comes from Chicar Parmenik, Prudential Securities.

Good evening. Couple of questions. What's the JP Cap Ex now and then I'll ask a couple more.

We just answered that question. UMC J is 100 million U.S. dollars and also UMC I is 100 million U.S. dollars.

Okay. I'm sorry, I joined a little later. What other trends are you seeing in context of wafer starts? Have your wafer starts been declining at this point or are the wafer starts [INAUDIBLE] declining?

We have been forecasting the Q3 or Q4. We have certain declining on the wafer out so that's part of it starting right now. That is our statement. We're declining about Q4, about 7% compared to Q3.

Right. On a monthly revenue basis, do you expect that you basically sequential revenues are still declining October, November lower than October, December lower than November?

Yes, we had to forecast the sequential total Q4 declining in the revenues. We gave the guideline already.

Okay. And that's about it. Thank you.

We'll go next to Jonathan Ross, Goldman Sachs.

Hi. Just like to try to clarify a little bit regarding operating costs in the third quarter. Total operating costs, cogs plus operating expenses. And let's just put aside where the fab 12-a depreciation expenses were booked, so we'll ignore that. Just looking at total operating expenses including cogs and operating costs.

I would have thought that there's a chance that they could have actually been down and they are up, actually, about 300 millionish. Wafer shipments were down 7% sequentially and depreciation expenses for the quarter were roughly flat quarter on quarter. R&D and sales and marketing were down a pretty substantial amount combined. So it would seem, given those factors, that, you know, this was a chance to actually reduce your total coasts in the quarter. So I'm just wondering what happened that caused total costs to actually trend up a little bit?

I think one of the statements is not accurate as related to depreciation. With all the new equipment, especially in the 300 meter, gradually all kick into production. So we need to put depreciation into the overall expenses.

Okay, because on your cash flow statement, depreciation is basic basically more or less flat. So are you saying you might have pulled in some depreciation in wafers from the ones produced in the second quarter but shipped in the third quarter?

No. That's not true.

The other reason is the loading in quarter 3 was lower than that in quarter 2, so if you remember from our accounting workshop, the inventory carried the fiscal will be less because of the loading in Q4 will be further down.

Okay. All right. Maybe I'll just give you a call separately to follow that up. And then just looking at the fourth quarter, in terms of depreciation, what kind of depreciation would you be expecting there?

I think that the integrations and the question was the Q3?

So much of Q3.

Yeah.

Okay, and in terms of keeping -- hello?

Yes, we are here. We are here.

Your capacity is relatively flat in the fourth quarter versus the third quarter. But you may be adding a little bit of equipment. Are you doing any -- are you moving equipment potentially to other fabs within the group out of, for instance, fab 12-a or anywhere else?

No. In this -- first of all, we are not moving the equipment out in the quarter four, in Q4, but the capacities, we did increase a minor about 5% compared to Q3.

Okay. So you might be -- it's possible you might move equipment out in Q1?

No. We don't have any plans yet.

No plans yet.

Yes.

Okay.

And just a fine quick clarification. When you talk about your percentage of revenues at .13 micron. Is that pure wafer revenues, or would that also include design services and other types of revenue?

That's pretty much on pure on the wafer revenues.

Okay. Thank you very much.

We'll next go to Oshif Omar, Credit Suisse First Boston.

HI. Thank you very much. If you could first, you know, give us some sense of how are the rolling forecasts from the customers behaving compared to some time back, how are they looking now?

The rolling forecast on our customers right now, most of them, they are very -- visibility's not very high. But, um, and also most of the customers feel they are conservative at this time frame except maybe the more aggressive is on the communication sector. It seems has more solid forecasts. On the other sectors seem that right now is the market visibility is kind of low.

And, um, so within the visibility, you know, they forecasted maybe a month back and the forecast now for Q4 and beyond, has that moved up, is flat, moved on?

I think in the Q4 forecast is already solid there, but we were talking about visibility in the Q1 next year. That's why we gave you more solid guideline for Q4 this year. Next year for the year 2003 Q1, in general, we haven't given out that much guideline.

And for 2003 as one of the many places semi conductor industry, can you share your views on the outlook, not for UMC, but what type of outlook for the 2003 semi conductor.

This is a very hard question for anybody to answer, but for UMC, position-wise, at this time frame, we are very difficult, really to give you any guideline -- very accurate guideline because anybody as good as you can guess to anything, it's so many factors in place.

And my last question, you transition guidance, does that factor in the maintenance which I understand has been at once from first quarter to fourth quarter? If it has, what percentage of benefit, what percentage benefit we are getting because of the maintenance or during maintenance time the capacity is taken out --

This forecast is based on the maintenance assumed that days are still working days used to full capacity to forecast.

So you said this will be some full capacity?

Yes. If we discount those, the utilization will be higher.

Thank you very much.

We will go next to Bernard Dishoma, Daiwa Securities.

Good afternoon, gentlemen. Is it possible to give us a little bit of breakdown on non-profiting income like where are the places you made losses on the last quarter? I think the profit already got it all right.

Yes, Peter mentioned there was 17 million from the foreign exchange, and investment income from the equity subsidiaries was 306 million unit dollars.

Further breakdown on the equity part like from UMC J how much losses you contributed or --

79 million.

Okay.

A second question is on your idm side, like, we saw like you had quite a significant interest in the idm contribution on the third quarter, is it possible to give some color on what those idms are and what you are doing for them?

Okay. Majority of the idms, if you look at it, is from the regional Europe and the U.S., those two areas and their application is mainly on the communication areas. If you look at the product mix itself, if you look at it, you'll find out the big gain on the communication sector's also from the Q2 communication 22% communication to Q3 increased to 37%. So this is a big abdication. As you know, communication in the past all belongs to idms. All of the market is occupied by the idm company. That trend still continues in this time frame.

And last question about the 19 millimeter technology, like when you are going to do that double part and maybe you are targeting to bring it to market?

We are targeting that as last quarter we just stated in 90 millimeter will be in Q2 next year and end of Q2 next year will be in pilot production.

And with declining Cap Ex, is it going to affect your schedule?

No.

Thank you very much.

Our next question comes from Herman Kwaw, [INAUDIBLE].

Hi, good evening. In terms of your asp guidance, you are guiding down to 5%.

Yes.

But as I understand, the technology mixture getting richer [INAUDIBLE]. What's happening here?

I think they are due to two factors. One of the factors, of course, with the maturity of the .13 micron with the discount is a price declining. Second thing is we see some minor price pressure in some sectors in the Q4. That contributes to overall is probably 3% to 5% of the asp decline.

When you say minus price pressure, can you elaborate as to which sector, and are you taking on some fab as well? [INAUDIBLE].

We don't have a fab filler. Right now, we have only logic parts. But with the loading, as you know, we are loading us and also it's not that high as Q2. We all in the Q2, we both are loading as close to 70% to 80%. As we know, the loading is close to UMC to up 50 situation to loading when it's loading low chin would be the pricing. So we factor those in.

Okay. And just looking at gross margin default default presentation that declined quite a fair bit from Q2 to Q3. And you mentioned in the announcement that fab 12 is obviously contributing to the declining gross markets before depreciation. I was trying to get a sense if we exclude the impact of fab 12, what would the gross markets for the position be? And also looking forward, when do you expect fab 12-a to begin generating margins to comparable to the group average?

As we stated, the majority of that gross margin getting worse is because of we put the 300 millimeter depreciation in. So if you factor that out, our margin will maintain about the same. Actually in a way it is a little better. Because in the Q3 period of time, the asp is higher. There's more micron technology in there.

Just in that presentation, I guess it's not correct to just take the cash flow depreciation from what your p & l, is that correct? Because you've stated some position within your slight presentation. Just moving on. Just final question. Could you give us a sense of who your customers are and what concentration is it of the percentage of your revenue?

I'm sorry, your question? Customers? As you know, we have media tech. The other rest is 40% of 50%. Total top ten is 53%. Top 5 is about 40 -- less than 40%.

And you say media tech --

Designing is the media tech is in the top five.

Any possibility to --

And also emt micron.

Thank you very much.

We'll go next to Michael McConnell, Pacific Crest Securities.

Thank you. Good evening. Most of my questions have already been asked. I was just trying to get percents referring to the previous gentleman's questions regarding pricing pressures and sectors. Could you elaborate on what the sectors have been, please?

I think the overall pricing-wise, we have seen some -- not particular sectors. It all has pricing pressures with all different sectors, but we factor in about 3% and 5% overall. It's not particular sectors.

Okay. Just for modeling purposed for the fourth quarter, given that the, your JB with IBM on the micron has been completed, should we look at R&D and SG&A to track relatively flat in the fourth quarter? What are your expectations there?

Yes. We're expecting a relatively flat in the R&D expenses in the fourth quarter compared to Q3.

Okay, thank you. And last question I had was in your guidance, it says on the operating profit margins that you are going to be approaching a break-even level, could you give us some guidance then on the net nonoperating income lines, where that's going to be tracking and also your tax rate for the fourth quarter, please?

I think that in Q4, the numbers have maybe compared with Q3.

And tax rates still roughly 0%?

Yeah, yeah. Our tax rate is still roughly 0%.

Great. Thank you very much.

We'll go next to Don Floyd, Lehman brothers.

All right, thanks. Um, let's see. In terms of the wireless business or maybe I should say the com business, maybe there's concerns particularly by wireless and the new generation of phones. A lot of it is 2.5 gprs hand set chips. Are you worried at all that that may drop off going into next year as the prior cycle kind of gets out in the market?

I think as I stated, next year, visibility is not very clear. We can only do forecasts as our customers give us the forecast. So far, it looks like it still has reasonable growth in the global communication areas. That is so far we have seen. But we have to give the guidance quarter by quarter to give you a more accurate forecast.

Okay. Also, just in terms of tax expense, also, how should we look at that for 2003, just roughly?

I think that 2003 out, but right now, we are quite difficult to estimate.

Okay. Should we model then, just, you know, kind of a low single digit number or run -- I mean, is there enough tax credit this to be around zero?

Yeah. We actually mentioned the tax credit was about [INAUDIBLE], that's largely depending on the quarters for the next few years. If we generate more profit we can offset the expenses. So again, this is actually related to our performance for 2003, which we don't really have very good visibilities.

Okay, sure. Just the last question on the .13 micron wafers, say in the fourth quarter. What percentage is actually say, fsg, and what percentage is low k, and how will that trend next year?

This is kind of difficult to forecast, but right now, we have more percentage in the fsg than to low k.

Is low k the point where it's, um, becoming, um, more stable in terms of yields or I should say lower k than fsg, I guess.

The two low k wafers right now, the yield is also getting improvement as well as fsg.

Okay. Okay, thanks.

We'll go next to Mark Fitzgerald, Bank of America Securities.

Thank you. Can you give me an idea of how you do depreciation schedules for equipment in terms of time?

Five year plus one.

Okay.

When you report Cap Ex numbers for the quarter, how is that actually done, is that on a cash basis or is it done when the tools are shipped to you? Can you give us some sense on that?

On cash basis.

Okay. And is there a target that you guys run in terms of models as depreciation in terms of costs of goods and revenues here?

What exactly would you want?

I'm just wondering, I mean, do you target what depreciation should be and if you adjust your Cap Ex to that depending --

No, we don't do that. We base this on the market demand to do the forecast.

So depreciation can go up specifically many terms of revenue and it's not a factor in terms of the financial mod

In general, we have the market need and then we always want to spend more capacity to meet our customers' needs. It's driven by market not by the consideration of depreciation.

Okay. And are there any targets for 300 millimeter wafer production for 2003? You gave us some on .13. Didn't say anything about 300, though.

300 millimeters this year before the end of this year, we have 8,000 wafers.

And for next year, we have not given the total thinking yet, but we will see the market situation and make our forecast.

So you view 300 millimeters as the swinging capacity that you might need to fall back on?

If this is related to next year's forecast on the capital expenditure, what we can tell you one thing that the majority of next year's capital expenditures will spend on three hundred millimeters only. Not much of the capital expenditure, much more.

Okay, thank you.

We'll go next to Kiefer Shorkell, Deutsche Banc.

Yeah. I just got a couple of questions. One is on this .13, how many customers from fab, how many from idms, and two is from some of the fabulous companies like IDEM could possibly go through [INAUDIBLE]. So this and some other kind of disposable acid asset gain. Could you give some kind of insight to that?

The first question related to .13 micron?

Mm-hmm.

The .13 micron right now, the majority of the volume has come from the IBM companies. There's some system company that's also fabulous companies but sequentially, we're getting into mass production Q4 time frame. So the ratio between this time frame, we don't have an exact number, but still right now, it's done by idm companies because the majority of the complication is dominated by the idms.

And regarding nonoperating income?

Nonoperating income?

Can you repeat your question again, please?

I think perhaps you are going to have in Ideals in the next quarter or rather this quarter idem quarter. And this and maybe some other kind of assets which you translate to gain.

I think the Q4, the number is converted Q3s.

Okay. And in regard to the pricing you are talking of, are you seeing it really from the Chinese Foundrys, the lagging edge, leading edge or do you have a kind of I'm sure being in the same business you would be keeping kind of track on what kind of prices that the Chinese Foundrys are offering. So could you give some idea on that?

No, we believe this price pressure is totally by the market and demand and supply situation. As you know, our loading is lower as we give you guidelines. Accordingly, the price pressure is definitely there.

[ talking at once ] We don't think they have any inference to our determination of the pricing situation because they are stipulating and also every art. You have to be aware of the customers looking for the Thai pricing not the wafer pricing. If you offer 500 per wafer, the yield is 20%, it doesn't make sense at all. Also that relates to the quality.

Just one last question. At this kind of environment, this pricing and all that, what kind of utilization levels do you see as your operating break even?

Our guideline almost tells you the answer. Our guidelines give you almost a break-even point. Guidelines up 50.

Thank you very much.

Okay.

We'll go next to JP Morgan.

Yeah, thanks. Just a few questions.

First of all, I was trying to understand the volume outlook for fourth quarter. If I take the guidance for utilization and capacity guidance, it should high 50s would imply higher volume decline, so could you just explain that a little bit some and secondly, if I take the blended asp you reported in the presentation and multiply that by the volume and use an exchange rate of 3395 you mentioned, I come up with a revenue that's higher than the reported revenue. So if you can explain that a little bit. And finally, regarding IBM, the reduction in operating expense is due to no need for royal if I payments or going forward, is that correct? Those are the questions, please. Thanks.

Okay, for your question, I think the first one, our guidance is high 50. 58 and 59 also in the high 50 range. And our calculations suggest high 50 is a good indication for Q4 situation, and you should bear in mind there will be always some small difference in between wafer shipped and wafer produced for that particular quarter. That could be a 1 percentage point or 2 percentage point difference for the loading and guidance. And the second question is, we never really disclosed our asp, and there's also certain nonFoundry revenues. So the overall revenue base as well. So again, it shouldn't be a huge difference even based upon your assumption calculation, and can you repeat your third question and Peter will answer that.

Yeah, what's the third question?

Yeah. Just the operating expense going forward, you said on third quarter regarding the IBM. As I understand, historically, you were being quarterly payment to IBM for the technology development. Is that primarily at this point?

I think it's not the -- this is the [INAUDIBLE] that we send our people to get joint development program with IBM. Of course, there's some costs there. That is monthly we paid over that. Since the project is completed, so that particular payment is already terminated starting Q3 so Q4 would continue that into Q3.

Just one last question. Regarding the UMC I capital spending, you give a good indication for, you know, 2003 for the UMC pattern to focus is primarily going to be on 300 millimeter and perhaps .13 micron. For the UMC I, what plans, if any, at this point, what are you indicate you mentioned 100 million Cap Ex this year.

UMC I, we are planning as usual, we didn't slow down. That's the equipment will be put in by the end of Q1. That we'll put equipment in. But we may watch the overall the market situation make a decision at how fast we're going to put ramp up. But we will definitely put equipment in. It's just a matter of looking at the market situation determining how fast we ramp up.

Thank you very much.

We'll go next to Ivan Goe, DRKW.

Hi. Good evening. I just wanted to find out the details about the capacity utilization and third quarter and fourth quarter. Could you provide an idea of how the different utilization rates were at the mature as well as the leading edge?

About the capacity utilization rate, Q3 we give the guideline as 68%, right?

Uh-huh.

And then Q4, we have about higher 50s. So in general, there is a decline.

But how is the leading edge and the mature edge different?

Yeah. We have in the indication, we have in our Q3, we have about 37% from .18 micron below. And then we have the 40%. And in the Q4 is about -- the Q4 period of time belongs to .18 micron. Also we will see the .13 micron increase significantly in the Q4. We're going to 5% of total revenues.

I was actually asking the capacity utilization at .18 and at .25 and .35.

Yeah. And also the loading on the .13 micron right now, our situation is fully load. Actually, we wish we had more capacity in that situation.

Right. And how is it utilization at 300 millimeter in the fourth quarter?

300 millimeter in the fourth quarter, we believe, that 300 millimeter in general at this time frame, we under the qualification process for .13 micron technology. As far as the other technology, that's pretty much full.

Right. You push out some kapax. Was actually brought down to 300 million. Can you just explain what was not spent? I mean, what did you plan to put in but you didn't?

We cut off maturity of the expansion of 800 on the 8 inch wafer. 8 inch wafer for the capacity increase. Especially on the 8 inch expansion in general. As far as the copper technology in 3 hundred millimeter in the 12 inch, we also reduced some. The original plan was 10 k. Right now, we reduce to the end about 8-k. So there's about a 2-k difference in the expansion plans. The rest is as usual. This majority in two areas, okay?

Thank you very much.

We'll go next to Kevin Basilli, Thomas Weisel Partners.

Yeah, hi. A couple questions. Back on the Cap Ex for your affiliate. The $100 million numbers that you mentioned reflect a reduction over previous budgets set earlier in the year. And if so, what were those budgets? And the second question with regard to regard to delivery times and equipment, you mentioned that they are very short right now. Can you actually quantify how short delivery times are? Thank you.

Okay. As far as the kapax and the UMC J, it's not a reduction. It's like the original plan 100 million we are spending. At UMCi, we have certain reduction there. UMCi was original 600 million --

700.

700 million. Right now, the difference is 600 million. That means the slowdown comes to overall the ramp up plan. So that is the UMC I situation. As far as the second question, can you repeat --

Oh, the lead time of the equipment.

The lead time of the equipment, depend on what type. The majority of the equipment right now, you get within three months you can get it. But even with the [INAUDIBLE] sometimes you can get within three months. It depends on what the time frame. This time frame about within three months you can get it.

All right, thank you.

Our next question comes from Mika Chang, CSLA.

Thank you. Basically, I have three questions. I didn't really hear the nonoperating income side outlook for the fourth quarter. Is it going to be flat?

Secondly, can you talk about your maintenance schedule? Are they being pulled forward and if they are, what is the reason for doing that? Usually in the first quarter. Thirdly is actually, the classification for logic and memory has changed being bundled into the pc communication and the consumer area in sort of like a breakdown. Can we just go through the breakdown a little bit? Can you tell us where flash memory is actually located, um, because the presenter seems relatively small compared to what you usually do for memory. Thanks.

The Q4 nonoperating income was with Q3 is a threat. The second question about a maintenance schedule but in the past we usually in the Chinese new year. This time we decided to go with the Christmas time. The reason is because we figure out most of our customer now is focused in the either Europe or the Europe customer plus the United States customer has a bigger percentage. That's why we decided to get that lined up with the United States and Europe customer. It's not a particular reason we were doing that. The third related to the product mix category on a flash memory.

Yeah, if you refer to our quarterly report on page three, the fourth table there's a footnote that actually gives you a classification about products. We actually don't quite understand what you mean by it but we basically think of the extended memory out of the classifications and restate the historical numbers. If you go to the footnote, can you see the memory consists of extended flash e prompt and e square prompt.

Right. So there's no memory product, well, of course, nonembedded memory that's included in the computer communication classification, is that correct? No, the memory's included in there because right now, all the graphic is embedded in there. Right. Okay. Thank you.

We'll go next to Joanne Ito, Sliku Research.

Hi. Congratulations on your great quarterly performance.

Thank you.

I would like to ask you a question regarding your status on the activities in China. Has that been delayed? Does your Cap Ex number reflect, um, some activity in China? And, um, do you expect to see more of that in 2003 in terms of your Cap Ex expenditures? And what do you think the business outlook in China is for the next quarter or two?

I think the China situation, as we stated in the opening, at China, we are no activity. We have to watch very carefully on the overall, the um, the government on the regulation. When the government come out very clear picture what's happening, how to apply for, we will apply for. So that's why there's no capital expenditure related to China. I think in the near future within the next year or so, we don't see any significant impact to our business plan. But beyond that, we are very hard to predict at this time frame.

Thank you.

Thank you.

We'll take our next question from Stuart Miller, excuse me, Adams, Harkness and Hill.

Thank you. Good evening. I have a question regarding the question earlier. I think you said in 2003, you have a goal of 20% of your capacity would be at .13 micron. And my question would be, how much capital spending would that require to get there?

First of all, we need to correct that. We didn't say 20%. We were saying 15 plus.

That's revenue at 20%. Capacity is 20%.

Okay. I'm sorry.

Yeah, by the year end.

But in general, the capax on that one with this time frame with today's situation we did not calculate very accurately how much spending requires that. We do not have that number yet.

Okay, fair enough. Thank you.

Thank you.

Once again, that is star one if you have a question. We'll go to Michael O'Brien, Soundview Technology Group.

Um, yeah, hi. Just a follow up question. Um, on the some of your affiliates, can you say what orders have already been placed for the equipment deliveries for UMC I mostly but also for UMC J? Have you placed those orders yet or are they orders that will be forth coming in the first quarter?

I think for UMC I and UMC J's capital expend chores, the appeal is already mentioned?

You mentioned UMC I's delivery of equipment first quarter. Do you have those POs already in place?

That's not an issue yet. As you know, we stated the delivery time is very short, within three months. So we were saying the UMC I's, the last ram am up would be by the end of the first quarter. So we still have some time to really make a decision.

Okay. And what do you expect right now to be the spending for the first quarter? You said you were going to look at it and see how much, you know, how the market situation is, but you will be taking delivery of some equipment. Can you give us some kind of magnitude? Is it the 300 million or so that's less than what was originally planned for this year or give us some sense of the first quarter.

I think for the first quarter right now, we don't have any clear picture because the market variation is so big. We like to give us more time to look at what the market really needed on the .13 micron on the next few months. Now, we make a final decision. We are pretty much with next quarter guideline or by the end of next year Q1 next year, we will have to give you a more clear picture what capital expenditure is for next year target and also give you clearer picture.

Just because I'm just trying to get a little more complex on the carpentry. You said you were taking delivery of equipment in the first quarter for UMC I. What's the minimum amount that you can spend there, um, or just give us some idea of how much you will be taking for that first quarter since you said you are definitely going to be taking it.

We're trying to create to step a pilot line.

To how many wafer starts?

At least pilot line.

2,000 wafer starts then?

Um, 1,000 to 2,000.

Okay, thank you.

We probably have time for the last question.

Very good. That will be a follow-up question from Karis Klaupp, [INAUDIBLE]..

Hi. Just a follow-up. In terms of customer for customer momentum, have you seen your communication customers being a bit more conservative in your forecast?

The communication more conservative? Not really. Actually, we see communication continues their demand is there.

Okay. I -- the demand obviously grows about, let's say compared to the numbers given a month ago, have they been more conservative than the forecast moving forward?

Yeah. In a way, they have slowed down some, but in general, they are keep whatever the target original was.

Okay.

And just finally, as I sense some of your optical storage customers have predicted quite strong quarter fall, but it just don't seem to be reflected in your numbers. Is it because just join down inventory or is it because one customer is stronger and your competitor weaker?

We do see this particular customer has already been higher. But overall, consumer is kind of slow.

Thank you very much.

And Mr. Liu, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you. Thank you all again for your interest in UMC. Please feel free to contact us or Christianson if you have any additional questions. We look forward to your participation next quarter. Thank you and bye-bye.

That does conclude this UMC conference call. Thank you for your participation. You may disconnect at this time.