聯華電子 (UMC) 2003 Q2 法說會逐字稿

Good day, everyone and welcome to the UMC second-quarter 2003 earnings conference call.

Please be aware that each of your lines is in listen-only mode.

At the conclusion of the presentation, there will be time for a question-and-answer session.

At that time, instructions will be given about the procedure to follow if you would like to ask a question.

For your information, this conference call is now being broadcast live over the internet.

A replay of the call will be available at www.UMC.com under the Investor Relations investor events section until September 30, 2003.

Also, a telephone replay of the call will be available from 11:00 AM Eastern time on Wednesday, July 30, until midnight Eastern time on July 31.

To access the replay, please call 888-203-1112, or area code 719-457-0820, if you are calling from outside the US.

The access code will be 748327 any time during this period.

I would now like to turn the conference over to Mr. Chitung Liu, Finance Director of UMC.

Thank you, operator.

Welcome and thank you very much for attending our second-quarter 2003 earnings conference call.

We're hosting this call from Taipei; and here to help report results are Mr. Peter Chang, Vice Chairman of the Board; and Mr. Stan Hung, CFO.

Before beginning this presentation, I would like to remind everyone of our Safe Harbor policy.

This is, that certain statements made during the course of our discussion today may constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be out of the company's control.

For these risks please refer to UMC's filings with the SEC in the US and the NFS (ph) in the ROC.

I would like now to turn the call to the first speaker, Mr. Peter Chang, Vice Chairman of UMC.

Hello, everyone and thank you again for joining us today.

As always, we appreciate it that you are interested in UMC.

I am going to start with a brief summary of our operating results for the second quarter.

You all should have seen our press release by now.

So I am going to keep these remarks short.

Following the summary, I would like to give you a quick recap about some of the key questions and answers we went through in the local investors conference a few hours ago.

Following this, we will leave the rest of the time for your questions.

Here is a short summary of our results from the second quarter of 2003.

New customer wins in PC sectors was the key reason for our strong Q2 performance.

Quarter over quarter revenue increased by 21.3 percent to $NT 21.7 billion or $US 627 million.

Quarter over quarter operating profit increased by 255 percent to $NT 2.5 billion or $US 72 million.

Net income rose more than six times to $NT 2.7 billion or $US 78 million, Quarter over quarter shipments of 8-inch equivalent wafers increased 23.3 percent to 550,000 and blended average selling price declined by 1 percent.

Now, regarding the guidelines for our third quarter, we are expecting wafer shipments to decline by low to mid single digits; and our average selling price to be flat to showing a slight increase as it compares to the second quarter.

Capacity utilizations should be close to 80 percent, operating profit margin close to double digits, and the percent of revenue from 0.18 micron and below technology to be approximately 45 percent.

And finally, we are expecting to see the strongest growth in the third quarter from the consumer segment and are expecting the communications segment to remain weak.

Now moving on, I would like to recap of the major question-and-answers in the local investing conference held a few hours ago.

First, the question related to the UMC said it will accelerate investment in a 12-inch manufacturing facility.

But what is the assumption for ramping up the advanced capacity so aggressively?

I would like to explain here it is because we have a strong confidence about the 12-inch technology as well as the 0.13 and below technology; and recently we had some breakthrough in the defect density on the 0.13 micron node; and we feel that we should take advantage of advantage in the short period of time we can ramp up the 12-inch capacity.

And also, we have a strong indication even though our quarter 3 has a small dip in the revenue, but we think the bottom of the revenue will happen in August.

And beyond that we feel we have some signals that we can see Q4 continue going up with the revenue as well as the profit.

So we believe in year 2004 we will have a stronger need for the 0.13-micron technology and below.

And in order to utilize our know-how and advantage on the 12-inch technology, that is why we want to accelerate this program.

And the second question is related to UMC's R&D strategy, particularly in the area of 12-inch manufacturing and 90 nanometers and below process technologies.

As you know, UMC was used to (ph) their 0.13 micron node, we have a joint venture with some company.

And we learned experience with the joint venture program; we found out their different opinions.

Also we have dual efforts both in our site and also the other site, so created tremendous problems financially and also the timely.

That is why our 0.13 micron in an initial phase had certain delays, as well-known in the industry, even though later on we catch up.

We learned a lesson.

So in the future UMC's strategy, with the technology which is 90 nanometers and below, we will be inclined to be developing in our own house, and then that will be concentrated and more cost-effective.

Joint venture development programs, nominally we think we save the dollars, but eventually you waste timely resources.

And also because of different opinions we may have some wasted resources, too.

So that is the trend we are in future going to be, but also we're inclined to go with a partner instead of going joint development work that we were trying to concentrate the so-called program culture, i.e. the joint engineering efforts.

So in general we have (indiscernible) coupling in between the partners and our most close friends and companies that we can change the experience and change the technology know-how in a limited way.

And that way we can have advantage of sharing the information.

In the meantime also we can get into valuable timing for each company.

The third question is related to clarify our business model, and pure semiconductor foundry or the partnership foundry.

And as recently we have stated in the our CEO statements that says we will be concentrated on the pure foundry model.

And this statement is not changing the direction of our strategy.

It's reemphasis, and from day one we are pure foundry since 1995.

We decided to be pure foundry.

In between that we have emphasized certain things like partnership foundry, which is an emphasis on, -- we will focus our resources on a more limited partners such that we can focus.

And in the meantime we also want to invest some partners.

We just can't bring them their intensity of capitals.

In the meantime we also gained valuable marketshares and the guarantee in the future they are going to be foundry for using our capacity in the future.

And this strategy was announced at last year sometime, but was misinterpreted by the industry as a virtual idea (ph), which is we want to make it very clear that we are not a virtual idea.

We are participate in certain design house, but just for the purpose of penetrating market.

Eventually we will capitalize this and sell it out.

We don't want to control any company in the long-term wise, so we are purely focused on the our sort of core competence in our service and technology.

This is our way to bring our customers.

That we like to emphasize here, so that is pretty much our statement trying to clarify the business model.

Thank you.

Thank you, Peter, and operator, now we're ready for the Q&A session.

Thank you, gentlemen. (CALLER INSTRUCTIONS) Dan Heyler of Merrill Lynch.

I had a couple of questions.

First was a pretty simple one in terms of your capacity, as you have itemized your different fabs in the press release, quite helpful, I noticed that some of the 8 inch capacity is coming down.

Do you attribute that to upgrades and if so, which fabs are you upgrading to which technologies?

And if not, are you selling off the technology or moving capacity elsewhere?

Okay, mainly it is on the 6-inch and also on the 8A/B, if I remember correctly.

These two fabs, as you know is -- all those fabs and we have some equipment which is obsolete.

So we take it out and we upgraded this 6-inch in general.

And we have some old equipment which is beyond 1 micron, which has a limited usage of today's situation, so we simply removed it out there.

As 8A/B wise, we had some older equipment which is existing there.

Mainly we found out anything that beyond that 0.35 has a very limited demand, especially 8A/B.

We have some capacity on the 0.45-micron node, which has a very limited usage in today's situation, so we migrated.

And also we upgraded some equipment to 8A/B, upgraded to some 0.25 node.

There is more capacity in the 0.25 node than the other node.

That is the situation for those two fabs.

And on 8E then, which I noticed going to 83 down to 75 by year end, what is going on there?

Yes, 8E, if you remember 8E, we are merging a whole tack (ph) old fabs which has some very old equipment, which is on the 0.45 and 0.35 range.

And we would like to upgrade them to get to 0.18 microns, so that 8E has shrinking that particular capacities because for that reason.

Great, thanks.

And on the 6 inch, is there a possibility you could maybe sell that to a third party, the committee do (ph) something?

Yes.

We usually -- those are very limited.

We just sell to used equipment vendors.

That is through our purchasing department, we sell them.

It is not a big number.

Finally, I guess just on China, do you have an estimate of your indirect or direct -- I guess it would have to be indirect available capacity in China?

And what your plan in China would be over the next six to 12 months in capacity, or again indirect capacity, that you could potentially give customers?

Right now UMC has low capacity in China.

And we really have right now in the planning stage trying to get some capacity in China.

But in between there, right now the urgency is not that hard anymore, because our customer and also some recently that have certain talk or information from the news that says the China government is considering to lower down their so-called value-added tax from 17 percent down to 13 percent.

So that will lower the incentive for some of our customers to go into China to manufacturing the thing in China.

So that situation is where we value very carefully in between our -- we have to advocate government approve.

Matt Gabel of Calypso (ph) Capital.

Could you talk about what your 0.13 revenue will be in the third quarter as a percent of your total revenue?

The third quarter we have close to 10 percent of the total revenue.

Close to 10 percent.

And generally speaking, how are wafer starts looking now, as we exit July?

Have they inflected at all?

Are they stable?

They are pretty stable.

Actually 0.13 should be recovered some.

If you notice 0.13, actually in the second quarter has reduced a certain degree; but it is due to the SARS reasons and make a (indiscernible) and customers reduce their starts in the second quarter.

We see that similar trend in the early part of Q3, but the later portion of Q3 seems gradually recovered.

Thank you very much.

Shekhar Pamanick of Prudential.

You said that August being the revenue bottom month for you on a monthly basis, so that essentially means your wafer stocks have actually moved up in July?

Assuming I could count still about six weeks to eight weeks?

And I have one more, if you can a little bit talk about it.

The cycle time in general depends on the technology, so I cannot give you a general guide.

But on average, it's about a two months cycle time.

And also the previous conclusion, that given August being the bottom revenue month, that would mean your wafers times have turned up again?

That again is dependent on whatever technology is (indiscernible) by August or by September that we should be able to see some, yes.

Maybe, if it is possible to give a little bit color on utilization rates by different technology?

We have a general guideline given in the third quarter is around about 80 percent.

We haven't really gone through detail of what our technology is split there, but you can roughly look overall at our technology split.

We have given guidelines in Q3 about each technology, what the revenue base is there.

You can divide by ASP; and that should probably give you pretty much the idea.

One more, if I can.

UMCi, there is 200 million CAPEX for 2003.

Is that the total JV CAPEX, or is that UMC component of that?

Total JV CAPEX.

And I think there was a press release that you would be spending about one point some -- north of one billion number.

How much money has been spent, will be spent, by end of 2003?

Well, we plan to spend 200 million also this year for UMCi.

But from now to the year-end of next year, we are likely to spend about 1 billion to ramp UMCi to 10,000 wafers a month, and we already spend some money at the end of last year.

So in terms of CAPEX for accounting reasons, 200 million is the number for this year.

And is UMCi primarily 0.13 technology?

Or does it have 0.18 as well?

I think in the UMCi we only have 0.13 micron and below technology.

Pranab Sharma of Daiwa.

I have a question about average selling price.

You have guided relatively good product mix for next quarter, third quarter, but you said the ASP will be stable or maybe a marginal increase.

Is there basically maybe your total number out of your output, measure of the product that is going to your partners?

And that could be the reason why your ASP is declining at this point?

Or is there prior pricing pressure there?

I think we stated there's not for the partner we have using the pricing or trying to give the favor of pricing.

It is not that at all.

And we stated very clearly we are a pure foundry model, and we're not giving special favor.

And we can help them in technology and also the service in that part.

We are not by the favoritism about the pricing sell.

For any pricing declining, definitely related to the market.

But at this moment, we didn't see that very big pressure to reduce the pricing.

It's almost every note of technology almost in a very flat region at this timeframe.

And why your ASP in the third quarter '03 looks stable despite your improvement on the product mix?

The product mix is not an explosive change.

We're moving from 38 percent to roughly 45.

And we did guide that ASP will be flat to up.

So this gives some potential to increase (multiple speakers) before third quarter.

Okay, fine.

Next one is could you elaborate a little bit on die cost basis?

When you think that your 300-mm fabs will break even with the 200-mm fab?

Any roadmaps on that?

Die price?

Die cost basis.

I don't know what your question is, because in general we are selling these by wafers, foundry by wafers.

Very special occasions we provide (ph) them, probably percentages of less than 10 (technical difficulty) of our revenues from die bases there.

It's for a few reasons.

One reason is they're in the early stage or in the something, that we would like to encourage the customer to put it in the technology nodes there.

We put it at kind of a die basis, to guarantee them to get into this node.

Otherwise we generally sell in the wafer basis.

But we have certain guarantee on their yield, and there is a window on the yield, that is in general a business practice with them.

Just to give a little bit of idea, like whether your 12A, that particular 12-inch fab, is it profitable?

Or to become profitable, what type of size of the wafer?

How much wafer do you have to produce per month or per quarter?

We have roughly calculated, if we get loaded like 7,000 wafers, loaded, fully loaded, you will get a breakeven.

It also depends on the technology, the product mix.

Because the 12A has a 5,000 0.15 micron load; and about 2000 or 3000 roughly is 0.13 micron loads.

So when we load more per 0.13, with maybe 5,000 we will breakeven.

If I may ask it, the last question is about your cash level.

It looks you had an almost record high cash by last quarter.

What are you going to do with this particular cash?

And whether you have any plan?

Because this cash may drag your ROE.

This cash actually, if you look at it on a net debt point of view, we do have outstanding debt, needs to be paid back over the course of the next 12 months.

So we actually barely cover the potential debt repayment from the cash we're holding right now.

Now of course we also mentioned our commitment on 12-inch B investment.

And that is going to accelerate in the next year, so that will also require some funding as well.

Steve Wolf (ph) of Commerce Bank.

Just a little bit of clarification over the UMCi joint venture in terms of CAPEX.

Are you saying there is about (technical difficulty) to be done for the joint venture as a whole between now and the end of 2004?

And that you can likely just spend around 200 million in the second half of this year?

That leaves about $800 million for next year.

I was wondering if you could possibly break it down at all into the split between you and your partners roughly?

Or is largely in line with your ownership of the JV itself?

UMCi operates as an independent company.

They have their own budget.

So we do along with other shareholders pay according to the schedule, but in terms of CAPEX payout, it's actually coming out of the independent entity, like UMCi itself.

We don't have to pay money to UMCi, and then they pay to CAPEX.

That is not the case.

Bhavin Shah, J.P. Morgan.

Just to start off, we were talking about the breakeven earlier.

For UMCi, would it be a similar type of breakeven, 0.13 wafers, 5000; how would you, -- given it is a separate entity?

It will be very similar.

Okay, now a question on the tax.

You had an income tax expense quarter.

Could you inform whether the cash tax is running near zero; and if you see any change to that situation in the foreseeable future?

The income tax is (inaudible) cash payment.

Right; so I understand that you generally don't have -- you're near zero cash tax on an annual basis.

Is that situation likely to change in the next couple of years?

Or giving your deferred (technical difficulty) you expect to not require to pay any cash tax?

I think income tax, (inaudible) forecast, probably forecast.

But I think around the 10 to 20 percent income cash rate we need to include in the out, forward-looking quarter.

Great, but again that is also non-cash?

That is non-cash.

All right.

Just thinking about the capital spending outlook for next year, you have given a fair bit of information about how much you need to spend for the 12-inch capacity for UMC; and you mentioned 500 million between now and next year; and a fair bit of that will be spent this year as well.

So is for any other additional capital spending for UMC that is required for next year?

Beyond what you're saying about the 12-inch CAPEX for UM?

I think the 500 million is actually today's restatement.

Actually today we have a breakdown there; 12-inch only about 300 million roughly from here, from this year, year 2003, toward the end of year 2003.

But beyond the year 2003, to year 2004, we said from today to the end of year 2004, we're going to expand our 12A from present, about 7000 to 8000 wafers, to about close to 10,000 wafers -- 20,000 wafers.

So increase about to 13,000 wafers.

That is including that original 300 million, and then we add on.

In our estimation we didn't get very clear with how much we're going to spend.

We're going to be spending roughly from 500 to 700 million, in this range in year 2004.

So to answer your question, we don't have final accounting CAPEX numbers for next year.

All the CAPEX available for the investor community is only on 2003.

We provide CAPEX we commit or we want to spend on the 12-inch, just to try to demonstrate our commitment and our confidence in the 12-inch capability.

As for the 2004 CAPEX, that probably won't be available until later this year or early next year.

Thanks.

I guess what I was saying is, based on the commitment you have shown, roughly guesstimate your next year CAPEX.

We do have certain maintenance CAPEX in our range.

We also always have R&D related CAPEX.

Right, okay.

Could you say, you have obviously given the equity contribution of UMCi this quarter.

Could you comment on what sort of revenues UMCi generated in the second quarter?

And how does it look going into third quarter?

In UMCi, in today's situation, because the UMCi initial installation, only in the back-end process only. and also we are only doing the so-called one of a kind, so it is not spending meant for the production.

It is just for the prequalification back-end of the process.

From now on what we are urgently to do is, trying to install it into the front-end right now.

Right now the PO (ph) is ready to issue and everything comes out there.

But by the end of this year, our expectation is the front-end equipment will be arriving.

And hopefully we can get those installed before the end of this year, to get qualified it early next year, and doing the further-on extension.

So the revenues probably sometime maybe in second quarter next year?

Maybe, yes.

That is it for me.

Thank you.

Emera Tennes (ph), of Newberger Berman.

Could you give a little bit more color on your end-market expectations for next quarter?

You said you expected communications to be weak.

Is it mostly coming from wireless or wireline?

Talk a little bit more about that.

I think next quarter will continue this quarter's trend.

Especially for the first two months.

It would be weakest on the wireless communication area, mainly the handset and baseband area.

Who was your largest customer this quarter?

We cannot disclose what exactly our customer is.

But the top ten customer was 53 percent of our revenue.

Was there any major change between this quarter and previous quarters? (multiple speakers)

It is always around 50, 55 percent, in between.

Ashis Kumar, of CS First Boston.

I think you did talk about 0.13 micron increasing;

Stan has said (ph) 10 percent of revenue in Q3 and (technical difficulty).

And this means 17 percent revenue in Q4 '03.

I was wondering if you could sort of suggest qualitatively which application segments you expect to drive the increasing contribution from 0.13 micron?

That is my first question.

Okay, I think we've corrected it; we didn't say the 17 percent in Q4.

We said 15 percent by year-end.

And as far as the application on the 0.13 micron, I think mainly at present time we have two areas.

One is FPCA (ph) area.

The other one is the baseband application, as well as the printer.

And in the future, moving on to the second half of this year, we will see some new applications put it in.

Some consumers where we put it in.

We have certain processors who are being at 0.13 micron technology.

And others, this thing will be added gradually.

And we see some new design and new intent (ph) should be coming in, especially in the consumer areas.

Will be moving in the 0.13 micron in the early part of next year or further on.

And so then, did I hear you correct you said certain processors, even graphics, is that what you said?

Yes, it could be.

Okay, thank you.

My next question is, in the second quarter you had nonoperating expense of wafer scraps and certain inventory losses incurred due to customers withdrawing from specific markets and halting work in progress.

Could you elaborate on this, please?

There are two separate items. (technical difficulty) which we had similar expenses in the previous quarter as well.

That is mostly related to our high-end R&D-related and testing-related 90 nanometer and 0.13 wafers.

So that should be quite easy to understand.

And there's also one item, about 366 million expenses; we call that the loss on inventory.

That is mainly that, as we mentioned press release, there are customers withdrawing from their extensive market; and that left unfinished goods to UMC.

Since we still have the spillover, we have decided to take most of the value out of the inventory.

(technical difficulty)

Customers withdrawing from their markets.

Oh, their markets.

Okay.

And in your press release you also suggested that for the most part pricing per node was stable.

Does it suggest that things have, in a relative sense, improved?

That this quarter over quarter pricing decline per node is improving, as your transition rates are picking up?

Can you say your question again, please?

I was asking that, as you in the press release commented that pricing per node for the most part in Q2 was stable;

I was asking whether given (technical difficulty) the sequential decline in prices on a per node basis has actually reduced, because your transition rates have picked up?

We did not say that our per node of the ASP is dropping.

We said it is pretty stable.

That's why we were saying the (inaudible) improvement on node combination, that will give us ASP slightly up next quarter.

Okay, thanks so much.

William Dong, UBS.

I have two quick questions.

I noticed that in Q2 you've been generating quite a bit of operating cash flow; the position has been increasing.

I was wondering, what is the type of plans that the company may have with these new cash flows?

We have answers these similar questions.

We have several upcoming debt due to be paid back over the course of next year (ph) funds.

And also we saw a strong commitments to the 12-inch equipment (technical difficulty).

We also need those cash to fund the CAPEX for the course of next 12 to 18 months.

And the second question I have is, I notice that you mentioned that there is some yield breakthrough for the more advanced processes.

Can you provide further color on that?

And how is the yield progressing for the 90 nanometer?

I think we are seeing two nodes where we see the yield progressing.

One is 0.13-micron technology.

Our to date 0.13-micron technology DD, defect density wise, is very close to 0.15 micron node already.

So that makes it very exciting in trying to get this technology introduced to our customers, which is waiting on the sidelines, waiting for the crossover point, which is costly.

By shrinking dies can become more cost-effective.

Second thing is 90 nanometer we are seeing a very reasonable yield on our pilot production with one of our key customers.

So we feel that in both nodes we have seen recent breakthroughs in that area.

Pyari Menon, Deutsche Bank.

Just two questions.

First one is, your shares outstanding which you state, does that include the 4 percent stock dividend that you gave?

Sorry, we didn't catch your question.

I think you have gone a stock dividend rate; if you have a 4 percent stock dividend I think it went ex (ph) in July.

And so there is 14639; is that rated average shares outstanding?

Does that include?

No, that was at the end of June. (multiple speakers) The dividend happened in July.

Just one more thing, you said that you have had this breakthrough in 0.13 defect density rates.

So I guess your 0.13 was profitable.

What kind of impact on the profitability of 0.13 (technical difficulty) alone do you see coming out of this?

I think the profitability, defect density wise, is not directly correlated.

But in the future it could help make a difference to our company's competitiveness.

Because the most by part (ph) our company to sell the wafers to the customers.

So it is beneficial for our customers.

And our customers accordingly will be (technical difficulty) to get a better cost from us.

They were being favored to do the foundries in UMC in the future, compared to our competitors.

And also will be attracting more customers, which is right now in the 0.15 node, will be thinking to design in 0.13 micron quickly, to gain the advantage of the shrinking die, making the die more cost-effective.

That is the future situation could help.

But immediately, from a selling wafer point of view, we didn't gain that much.

So the bulk of the benefits is going to be really passed on to the customer? (multiple speakers) price or whatever?

Yes.

Ivan Dole (ph) of Dresdner.

I have got a couple of question.

Just wondering, with UMCi they are increasing their CAPEX from 200 million, you said, to about 1 billion next year.

I was just wondering if UMC has got to put in any cash injection into UMCi next year?

I think in order to make the kind of investment in there, our Board in the UMCi definitely has to make some decision whether we have to put more money in, or something, capital-raising situation.

And also the rate cut, 600 (ph) million syndications (ph) are on hand.

So they have cash of 600 million today and --.

(multiple speakers) loan to be drawn drawn today is a 600 million facility.

Right, and on the UMC side of things, can we just get an idea of what your upgrading plans or capacity expansion plans for 8-inch wafers are for next year?

Because you did some upgrading this year.

Are there any room for more of that next year?

I think this year if you look at that most of our 8-inch is expanding (ph) on the 0.13 node in the 8B.

And that capacity by today's situation is already full.

So next year we will very hardly be spending big money in the 8-inch for the upgrade.

Very minor.

If anything it is making us (technical difficulty) which is probably regularly when the equipment is broken down, you probably have to upgrade it to a certain situation.

That is very minor.

Right.

Next question is, can you just give some idea about your comment earlier?

You said that things have started to pick up quarter; and you are confident that that trend will continue into the fourth quarter.

Can you just explain a bit what gives you that confidence that things will be on the rising trend into the fourth quarter?

I guess right now we cannot give you very, very detail on which sector or which things.

But in general we see some picking up in the communication area, which is a weak area, in the last two quarters, in Q2 and Q3, early part of Q3 also.

We see that start to pick up; gradually moving upward.

So we hope the trend is continue going.

And also from the news from the different areas we're gathering, we feel that Q4 we have some confidence we should be able to see some upturned situation.

Also (technical difficulty) strategy where you said that some nonrelated, noncore investments would be diversified away.

Can you just tell us what is the decision-making process on when and which ones to divest?

And basically when, and the timing would be a critical issue?

I think that we define a non-foundry core fittings.

If certain noncore holdings (inaudible), we will gradually reduce our holdings.

Would it be this year?

Would it be next year?

It is very difficult to decide because this is a pure market decision.

It is just like a normal investor. when you want to sell your stock.

It is just basically that as we see the right time that UMC will get some capital gain from there; and we will sell it.

Also it depends on the consumer market situation.

My last question also is this driver for the (technical difficulty) Consumer is the biggest, strongest driver for the third quarter.

Can you maybe give some details as to which application within consumer is strong for you going into the third quarter?

I think in consumer it is traditional that whenever the consumer is related to Christmas gift areas, which is the digital camera, chipset, and as well as the LCD drivers display, LCD TV; and as well the DVD player chipsets.

In general, in the holiday season in general, they will go upwards, so it will help the overall demand.

Leo Li, ABN Amro.

I have two questions to follow-up.

The first one is regarding the 0.13 micro.

You mentioned that you are going to increase costs to 10 percent in third quarter.

And you also mentioned that application generally is weak in the third quarter.

So is the 0.13 micron ramp coming from the consumer sector?

That is my first question.

No, the 0.13 micron is still from the communication area.

We do say that the recovery is happening in the third quarter, almost the last month.

Okay, so basically did we see also the same situation for PC in the 0.13 micron in the first quarter?

PC and the 0.13 micron?

PC 0.13 micron (technical difficulty) in general PC at this moment, we do not have a lot of exposure in that area.

Okay, great.

My second question, it is a dumb question, regarding the CAPEX number.

For December your (inaudible) going to spend about increased 12-inch capacity for; how much CAPEX we usually need to install equipment without a kinin (ph) cost?

And for example regarding a UMC 12A and also a UMCi ramp up next year, based on our commitment, how many CAPEX we are likely going to spend on that one?

That is my second question.

Right now we do not have the next year CAPEX line yet, but I'm pretty sure in the next quarterly review we probably can give you some guidelines in that area.

But we just announced that we want to do the 12-inch, for time-wise we right now do not have the exact number.

But we can only tell you that this year UMC alone is spending 500 million of CAPEX, which is 300 million on the 12-inch.

So my question is, for example, you're going to run up 20K tolerant (ph) to capacity, so usually how much CAPEX would you need for that (inaudible)?

I do not say it is a tight range (ph).

Okay, great.

Thank you.

Shiresh Strikely of Lyris Securities.

Firstly, I just wanted to understand one of your major LCD customers had recently indicated that they would be moving from six inch to eight inch.

Does that mean that some of your mature capacities are now running at 100 percent utilization?

I don't know what your question is.

Usually we don't want to discuss particular customers, but a lot of our customers on the LCD driver already in the 8 inch last year.

Okay.

My question is that is your six inch capacity running at 100 percent?

Our six inch wafer capacity -- I don't think it is 100 percent.

It is a high '90s.

Okay.

Secondly, at this 0.13 micron node, is it a profitable node for you now?

Yes.

And when did it turn profitable?

Was it profitable even in the previous quarter?

When did it turn into profit?

We think the 0.13 micron was also profitable at this time, just how much profit margin is the question.

In today's yield situation that we have been proved, we should be able to see the overall, it shouldn't be any problem at all.

Okay.

For your 12 inch fab, when do you expect for like comparison your total fully loaded operation costs to be lower than that of the eight inch?

If a fully loaders are 12 inch compared to a fully loaded eight inch, we (indiscernible) per square inch of silicon wide, 12 inch has much more advantage.

We roughly calculated the cost is 30 percent lower.

And when do you expect to reach that node, because that will come with the capacity, right?

Yes.

We have to reach marginally 20,000 wafers compared to the eight inch and 20,000 wafers equivalents.

Okay.

One final question regarding your 0.13 ramp guidance that you provided going up to 15 percent in the fourth quarter.

Because your major SG&A customers, they had indicated that the leading product requirements they would be splitting between you and IBM '70s to 30, so do you think that guidance could be at risk if that were to happen in the fourth quarter?

I think the 0.13 micron we said is not the fourth quarter.

We said that by the year-end, where the reloading is close to 0.13 micron node would be at 15 percent of the revenue.

That is not really the Q4.

Okay, so the question still remains by year-end, do you think that will be at risk is that SG&A volumes were to shift away from you to, say, IBM?

With the risk, where is the risk?

We don't consider it risk.

Today our 0.13 micron, I don't think our customer would walk away.

I don't think if our pure foundries pricing on the wafer pricing and defect density cannot beat the IBM, then we are out of business.

The model doesn't work.

Michael McConnell of Pacific Crest Securities.

I am sorry to dwell on this one subject.

I just don't understand.

You're saying that your product mix is improving going from 38 percent to 45 percent in terms of (indiscernible) micron and below, yet your ASPs are flat.

But your ASPs are are stable.

How does that, I just can't get around that.

How does that work?

Could you explain that a little bit further?

We did not say ASP would be flat.

Slightly up.

Slightly up, yes.

I would just expect it to be at least up by low - mid single digits or something, or that just my own --?

We did not give an exact number, but we would say it would be up.

So you could say maybe flat guidance to slightly up, that could be maybe conservative then, would that be fair?

At this time we have no comment on exactly average selling price there.

But the pricing is really sensitive there.

Okay.

On the communication side, just looking at the percentage of your total business, what percentage would be wireless versus Wireline?

Normally was two-thirds in wireless and one-third in Wireline, but this quarter we would see wireless and Wireline becoming 50-50.

Okay, and then could you just for all modeling purposes, I know it is tough, but on the net nonoperating income for the third quarter, could you give us an estimate of for that, because I know it moves up-and-down.

It's quite volatile.

The Q3 nonoperating income were bigger than Q2.

So it would be larger?

Yes.

And last question then I will go away.

Just to use the strategy clarify the strategy, so just to simplify it, it seems like you're moving away from any type of joint ventures on the advanced process technologies as we go to 90 nanometers, 65 nanomator.

However you're going to continue to invest in start-up companies or places where you think there is going to be a strategic fit.

Is that the way to look at it?

I think in general that we will understand the advantage of GDP and TEE (ph) and the disadvantage of that, so your statement in general is correct.

We're trying to do is by our own ability to be able to develop our own process moving along the way is much easier and more efficient as are learning.

Dan Heyler of Merrill Lynch.

I wanted to follow up on the question on how should we think about your 0.13 ramp, i.e. I guess we can think of it in two ways.

Peter, you mentioned that your defect density has gone way up so the economics is starting to kick in such that it is cheaper for customers to move product to 0.13, they lower their own costs.

So that's the driver there on the one hand.

On the other hand there are some new parts as well, so does this mean that we start to see the margin expansion, although units may be growing fairly slowly, let's say the next couple quarters, should we see significant margin expansion or should we think a gradual or modest margin expansion?

I think with the thing in the margin, I don't think it is that much of a difference.

If we are to see gradually that we would see the percentage of 0.13 micron in early part of next year, will gradually accelerated, because most of the customer right now, especially in the consumer side, as you know, their die price is very sensitive because their market is margin is very low.

Very competitive market, so they are very hesitant to the die price some kind of 0.13 micron technology and just for the sake of the technology, because they have to calculate to the bottom line to them is the die price.

Each die, how much cost and is.

If the 0.13 micron defect density is too high, they paying certain wafer pricing even would give them a competitive wafer pricing, but for die wise, it probably is not worthwhile compared to 0.15 micron, or 0.18 micron with today's pricing.

But with our improvement on the defect density in your 0.13 micron, and per die, wafer for the yield going upward and you will find out that the die cost is for our customers.

To operate that.

It would be encouraging more customer designing and accelerate or accelerate their program to move into this note, and we'll see UMC's to 0.13 micron technology node will be increasing significantly percentage in the next few quarters.

That will be help us, but it takes some time to do the marketing and sales work to help the customer to calculate their advantages using this technology node.

And then in terms of the new customers, that is your existing installed base as you incubate that technology?

And can we expect some new customers over the next couple quarters as a result of your partnership strategy that you're hopeful on, or is it still a little bit early to expect that in the next quarter or so?

I think next quarter is to early.

It probably would have to be two quarters down the road to see a significant difference.

That is why we put a very aggressive capital expenditure on the 12 inch expansion, which is toward end of the year 2004.

It is not immediately that will be happening in the next quarter or so.

And this last question would be on UMCi versus Fab-12.

How will that play out in terms of customers.

Is that a copy exact fabs such that you'll be able to move product around from one to another or do you want those to be differentiated fabs?

I think 12A in the UMC because of time to build up those two fabs, you cannot build them exactly the same.

The reason is UMCi with 12A build at that time to single wafer technology is not quite mature yet, so there is some batch type of technology still using 12A.

But, UMCi is UMC has decided to using totally single wafer technology in there, so this to technology, but even though they used the single wafer technology in UMCi is difference in 12A, but their technology or process by and large, they are compatible to each other.

Theoretically, our customer could move one asset from 12A, move to UMCi.

They should be able to produce very similar die out of the UMCi.

Pranab Sharma from Daiwa.

Could you possibly make some comment about the number of active customers you have at this point?

Our number of customers?

We have to few hundreds of them, if you count them all.

But our major customer, top 10 is about 53 percent of total revenues, so that is in general, that is the thing.

With your partners that model probably there is some chance that some small customer may go out of your hand, which is not important to you.

I want to find out whether your customer bases shrink?

Total number of customers shrink?

We did not really calculate that, but to us it is important to us is how effective is those customer is.

It is not a number of customers.

If we like, we can serve almost 1000 customers if we like, but unfortunately we have limited resources, as every company does.

We have to really select certain customers which we think have a great potential.

And a little bit of an idea about the development cost, that 65 nanometer, how much since you're going to probably for technology would like to by yourself development, what would be the approximate development cost for 65 nanometer node?

This is very hard to estimate because 65 nanometer node right now under development right now, still progressing and expect the expenditure continued to going there.

And we chance that this is the budget because a lot of them involved in how difficult technology is, and even we have a target on, we still have very difficult to estimate it really how much cost.

But one thing for sure is more advanced technology going on there would cost much more R&D cost.

I think UMC has a leading-edge technology boundaries that we have to spending those money to really make our technology leadership maintain.

Just to get a rough idea, a few hundred million is it a safe estimate or it could be much more than that?

It could be higher than that.

Bhavin Shah of J.P. Morgan.

You made a very perceptive comment how you have to be competitive by definition vis-a-vis the likes of IBM, and I think I completely agree with you.

If a reversed that comment, can we infer that in your opinion a typical IBM especially based in the U.S. cannot really compete with your foundries?

And perhaps if I can drag you a little but forward, if you look out three or four years, how many real serious sized foundry players to see apart from (indiscernible) and UMC?

I think the serious (indiscernible) foundries is very hard to the finest.

It depends on definition what you call serious foundry.

Some foundry companies, they maintain their revenue and they still survive there.

It is whether (indiscernible) significant, but if you use a certain criteria like 10 percent of market share, then it would be very limited.

I think that --

Would it be more than two?

Maybe more than two.

Maybe (technical difficulty) because foundry, as you know, the capital expenditure is very high and also even some people have asking how much cost for 65 nanometers development cost there.

The cost is getting higher and higher, and not a lot of companies could afford it.

Even a lot of IBM has dropped out of those nodes.

You can't really afford it anymore.

So we will see it very limited, key player will be only a few guys.

And does that mean you do not see any IBMs being unimportant in the foundry market long-term?

I do not think so in the long-term you'll be going to the direction because foundry is not only just at the capital and just expanding their capacity.

There is a lot of know-how which is only the people in this industry would realize.

That once you're in this industry you realize how fast.

The key thing is trying to get a one customer to the using your customer's technology.

Especially IBM ask for actually is a compatible technology, using your technologies.

And how quickly can you adopt their technology and bring up to yield the very shortest time, and sometimes your yield has to be better than IBMs.

And that is the way how we survive today.

Okay, thank you.

Operator, we probably have time for just one more question.

Matt Gabel of Calypso Capital.

I may have missed this.

Did you comment on what Q3 CAPEX would be and also just looking at the wafer shipment guidance for Q3, and the capacity guidance, if I assume with wafer shipments are down 5 percent sequentially, I am getting a capacity utilization rate at close to 83 percent.

Am I missing something there?

Our guidance on close to 80 percent meaning either up or down by two or three percent.

It could be slightly higher than 80 or slightly lower than 80, in terms of capacity utilization.

In terms of CAPEX outflow, Q3 is going to be roughly 120 to $130 million U.S.

And before I turn the conference back over to our speakers for final comments, I would like to remind everyone that you may listen to a rebroadcast of this conference at 11:00 AM Eastern time today through July 31 at midnight by dialing 888-203-11 or 719-457-0820, and enter passcode 748327 on your telephone.

Now, sir, we will turn the conference over to you for any closing comments.

Thank you again for your interest in UMC.

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

Good day, everyone.

That does conclude today's conference.

We do thank you for your participation.

(CONFERENCE CALL CONCLUDED)