聯華電子 (UMC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter 2006 UMC earnings conference call. My name is Sharon and I will be your moderator on the conference call today. [OPERATOR INSTRUCTIONS]. This conference call is also 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 Tuesday October 3, 2006. A telephone replay of the call will be available from 10.00am on August 2, 2006 until noon on August 3, 2006, Eastern Standard Time. To access the replay, please call 888-286-8010 or 617-801-6888. If you are calling from outside of the U.S., the access code will be 97333394. I would now like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin.

Thank you. Good morning, everyone. Thanks for joining us for a review of our 2006 second-quarter results and for the discussion regarding our strategy and outlook.

With me here is Mr. Jackson Hu, UMC’s Chairman and CEO. During today’s call, we will discuss the following topics, our financial results for the second quarter, an update on our business and forward-looking guidance. We will then leave some time for Q&A.

Before we get started, I would like to remind you of UMC’s Safe Harbor policy. Please bear with me for a few seconds as I take you through this.

Certain statements made during the course of our discussion today may constitute forward-looking statements that 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 are beyond the Company’s control. For these risks, please refer to UMC’s filing with the security authorities in both the U.S. and the ROC.

With that behind us, as you know from our press release issued earlier today, revenue for quarter two 2006 was TWD25.75b, representing a 5.6% Q-on-Q, quarter-on-quarter increase from TWD24.38b in Q1 2006, and a 32.4% year-over-year increase from TWD19.44b in the second quarter 2005.

Gross margin for the quarter was TWD5.17b, or 20.1% of our revenue, compared to the TWD3.26b or 13.3% of Q1 2006 revenue.

Operating profit was TWD1.63b, or 6.3% of revenue, and was much higher than the TWD85m or 0.3% of Q1 ’06 revenue.

Improvement on our two 300mm fab utilization rate was the primary reason for the better-than-expected gross margin during the second quarter.

Net income came in at TWD6.05b in the second quarter 2006, compared to a net income of TWD12.29b in Q1 ’06.

Earnings per ordinary share, or EPS, for the quarter was TWD0.34. Earnings per ADS were US$0.053. This compares with Q1 ’06 earnings per ordinary share of TWD0.67 and earnings per ADS of US$0.104.

More details are included within the financial data that accompanied our press release this morning. I would like now to turn the call over to Jackson for a discussion of our business and update on the third quarter of the year.

Thanks, Chitung, and welcome to everyone who has joined us on the call today. Very quickly, I’d like to review the Q2 result again.

Basically, the results of Q2 were in line with our earlier forecast. As Chitung just mentioned, revenue reached TWD25.75b, which represented a 5.6% growth over Q1.

ASP increased by 1%, while wafer shipments increased by 4%. We are also happy to report that the gross profit margin grew by 7 percentage points.

In terms of our market view, there has been a significant change in market conditions over the last three months. We have seen clear signs of higher inventory levels from some of our customers. However, inventory levels vary from application to application.

For ICs relating to flat panel displays and digital TVs, overproduction from anticipation of a high demand related to the World Cup has resulted in inventory build up which will take some time to digest.

For PC-related applications, the second quarter is traditionally slow. And although there is typically a pick up in demand in the third quarter, there are signs that demand is being postponed as the market is still waiting for the release of new CPUs and operating systems.

Recently, the two largest CPU providers have lowered prices. And the industry is avidly looking for indications that this lower price will stimulate demand.

For handset products, inventory levels are normal for the major brand-name providers, although there is inventory build up at the second tier and the non-brand-name providers.

Next, I would like to provide an update on our financial guidance for Q3. Based on our current business outlook, management’s expectations for the third quarter 2006 performance are as follows.

Wafer shipments are expected to increase by 0 to 2 percentage points. Wafer ASP in U.S. dollars is expected to increase by 6 to 8 percentage points.

The capacity utilization rate will be approximately 80%.

As for profitability, operating profit margin will be approximately 10%.

The percentage of revenues from 90nm is expected to be over 20%.

The breakdown amongst applications, in terms of communication, PC and consumer segments, will be similar to Q2.

And finally, our 2006 CapEx budget remains unchanged at US$1b.

The 65nm technology node is progressing smoothly and is in the rollout stage. We believe UMC’s success at the 65 and 90nm will accelerate our growth and improve profitability in the coming years. We are also working diligently on 45nm development with customers, and are conducting research on SoI, or silicone on insulator.

Overall, our performance for the third quarter of 2006 is expected to represent a strong operational and financial execution as we continue to further build a foundation for future growth, profitability and the long-term shareholder value creation.

Now I would like to turn the call back over to Chitung. Chitung?

Thank you, Jackson, and all of you again for your attendance. I will turn it over to the operator now and we will give you the Q&A instructions. Operator, please?

[OPERATOR INSTRUCTIONS]. And our first question will come from the line of Shailesh Jaitly from Nomura Securities. Please proceed.

Yes, hi. Thanks for taking my questions. Just wanted to first have some clarification on the inventories that you have highlighted, particularly starting with the handsets. You mentioned that you have seen some build up of inventories of the second tier and the non-brand makers, I believe it was the end market.

Now, when it comes to the IC segment, would it be fair to assume that your Tier 1 customers, you’re still [guiding] them in terms of treatment you are [offering]. And other [inaudible] Tier 2 customers?

Okay. Your -- there was a little breaking up on your question and I will try to answer as much as I understood you. If it’s not clear, please repeat part of your question.

Basically, as I mentioned earlier, that we observed that the brand-name handset providers are doing well and they have a reasonably low inventory, as well as the second tier or non-brand-name providers have their inventory.

And using China as an example, China used to have low-end or entry-level handsets for the white label handsets. And since the brand-name providers have decided to enter the entry level in a big way, so they have been able to take some of the market share of some of the white label providers. So that is, for example, a clear indication that these -- the non-brand-name companies are affected.

Sure. Thanks. In the China market, when you talk about the inventories, in your assessment, would it be possible for you to quantify as to what kind of inventories are there? Or if not quantification, if you could help provide as to when do you expect these inventories to clear up.

It’s not proper for me to state that. It’s better for you to question the IC providers or even the handset providers.

Okay. Just one follow-up on LCD part. LCD drivers, as a proportion of your overall shipments, what was it in 2Q and how does it compare with 1Q?

In Q2 it was 10%.

10%, thanks. And can you talk about --?

Q1 was 15. Q1 was 15%.

So 15%. And when you talk about the inventories here, are you seeing inventories primarily in the controller and demodulator ICs or are you seeing LCD driver inventories also in the TV space relatively at a high level?

We also see some inventory for the LCD drivers.

Thanks. I’ll queue up for some more questions later. Thanks.

And our next question will come from the line of Randy Abrams from Credit Suisse. Please proceed.

Yes. Good evening, guys. I wanted to ask you about the market guidance you gave, that you have the same mix in the third quarter as you had in the second quarter. Could you talk within that mix? Are there any applications that you’ve seen come back sooner or lagging more due to lingering inventory?

Right now, the situation is not that clear. Some of the customers actually are more optimistic about the situation and they felt the inventory correction could be as short as a couple of months, while others do not have such clear visibility.

Okay. And I wanted to ask on the ASPs, after the 6 to 8% balance in the third quarter, maybe talk about your prospects for continued ASP improvement. How much more leg room do you still have to get relative mix shift to leading edge that can drive that again in the following quarters?

What we can say is that we have more and more customers and more and more number of products going into production. And those customers and products are -- I’m talking about the advanced technology nodes, such as 0.13 micron and the 90nm. So as long as the demand stays reasonably strong, then we expect to see more high-end products in terms of a percentage. And that would help the ASP situation.

Okay. Thanks a lot.

And our next question comes from the line of Matt Gable from Weiss Partners. Please proceed.

Hi. Thanks. Could you talk about the current wafer start environment? Have wafer starts leveled off -- hello?

Please proceed.

Can you hear me? Can you hear me now?

Mr. Gable, can you check your phone for mute for me?

Can you hear me now?

Mr. Gable, can you check your phone for mute for me?

Yes, there’s no mute.

We will have to move to the next one, please.

Okay. Thank you. And your next question will come from the line of Mehdi Hosseini. Please proceed. Ma’am, we’re not able to hear you either. Can you please proceed?

Yes. Can you hear me now? Can you hear me now?

Mehdi Hosseini from FBR.

Yes. Can you hear me? Hello?

Do we have a system problem here?

No, sir. We’re able to hear you real clear.

Can you guys hear me?

We’ll try another one.

Okay. The next question will come from the line of Pranab Sarmah.

[Inaudible]. Hi. Okay. You can hear me?

Yes.

Fine. I have a couple of first housekeeping questions, first of all on your guidance. What is the depreciation guidance for the third quarter?

Depreciation, first of all, for the whole year will be about 7% lower than the previous year. This quarter we will see a linear decline.

On the third quarter, your 6 fab is supposed to be fully depreciated. In that case, you should be able to get about $1b benefit, right?

Sorry. Say that again, please.

The 6 fab, which should be fully depreciated by second quarter, so your depreciation in the third quarter should have gone by about $1b.

No, no. No, no. Again, the whole depreciation charge for 2006 for UMC as a whole will be 7% less than 2005. And each quarter we will see a sequential decline for throughout the year.

And just to recap about our total depreciation expenses for 2005, it was around 47b, if you include as well UMCi.

Okay. And could you let us know like on third quarter what percentage of revenue will come from 130nm?

It will be slightly higher than [22%] in quarter two. Again, the whole target for UMC by year end, we expect to see 0.13 and below, including 90 and 65nm to be 50% of our total revenue.

Okay. That is fourth quarter 50% of the revenue by 130nm and below is in that?

Yes. By year end. May not be the whole Q4, but certainly one of the Q4 -- one of the three months in Q4.

Okay. Then if you continue that trend, ideally you should improve your ASP in the fourth quarter as well?

Hopefully.

Hopefully. Okay. Thank you. And my next one is basically your non-operating -- sorry, your operating expenses have gone up because of some Oxley Act and all. Is that to continue forever in going forward?

In absolute dollar terms it should be similar to quarter two. Of course, our R&D will be growing in absolute terms but hopefully not faster than the revenue growth. So hopefully we can at least maintain the same percentage for R&D, while the other expenses should somewhat stay in a similar absolute amount.

And my last question is on the 8” fab. I understand your 8” fab utilization has been pretty low at this point. And when do you think that it will probably turn back and what measures you have taken basically to reduce down the cost structure in 8” fab?

I think, as soon as the inventory correction improves, then the 8” loading will improve. As I mentioned earlier, some customers see the inventory period -- correction period to be as short as two months. We did see some pick up in September from consumer products.

Thank you.

And our next question will come from the line of David Wu. Please proceed.

Yes. Thank you for taking my call. I just wondered, since you have lead times for customer orders, how did -- assuming the third quarter’s taken care of at this point, can you give us a little color on what kind of order patterns are you seeing for fourth quarter wafer delivery to your large OEMs?

And you mentioned also that the flat panel and the DTV business was -- had excess inventory that would take some time to clean out. Specifically on digital television, it seems that the LCD monitor type people are talking fairly optimistically about Q3 outlook, at least those that use your -- some of the ones that use UMC as their foundry partner. And I was wondering specifically on DTV. We are into the seasonal build. Do you see any signs that any excess inventory there is gone?

Lastly, on the PC side, I assume that you sell to the chipset people. And the price reduction by both Intel and AMD was one week in the past. So if there’s any response to the lower prices, we should see it now. Have you seen it from your customers’ orders, whether there’s any reaction to the long-anticipated big price cut a week ago?

Yes, it’s -- okay, you asked several questions. First of all, regarding the flat panel display, I think for digital TV the inventory situation, it’s too early to tell how quickly the correction has been.

For monitor, it depends on the PC actually. When you talk about the monitors, probably due to the PCs and laptops. And that is related to your third question.

And the information we’ve got is that it’s a little too early to say whether the price cut has generated a significant demand yet. It’s just -- I think it will take a little bit more time.

Okay. What about the early read on fourth-quarter orders -- for fourth-quarter delivery from your OEM customers?

It’s too early to talk about the Q4. I have learned not to make any forecasts beyond three months.

Okay. But your lead times are such that customers are beginning to place some orders for Q4 delivery, right?

Yes, but it’s still early in the quarter.

I see. Okay. Fine. Thank you.

Thank you. And our next question will again come from the line of Matt Gable from Weiss Partners. Sir, proceed.

Hi. Can you hear me now?

Yes.

Okay. Great. I was just wondering if you could talk about the current wafer start environment. Have wafer starts now leveled off at a lower level or are they still declining?

Wafer starts, have they leveled off or declining?

Yes.

You are making assumptions here?

No, no, I’m asking. Has -- could you describe your current situation with your wafer starts?

Wafer starts have been matching with our -- the guidance that we have provided since the quarter. We are only at the beginning of August. And a lot of the wafer starts will contribute to the Q3 revenues. So the situation looks quite normal.

Okay. Thank you very much.

And our next question will be a follow-up question from the line of Shailesh Jaitly from Nomura Securities. Proceed.

Yes. Thanks again for taking my question. Jackson, I just wanted to clarify on your previous guidance. In the last conference call you spoke about 2Q. At that point of time you were relatively optimistic about 3Q. Based on all the more qualitative statements what you made without quantifying the utilizations, firstly, I want to understand when you saw the inventories, when exactly were you surprised? Was it more towards the later part of the quarter? And going -- yes, please?

Finish your question, please.

Yes. And the second part of the same question, what I wanted to understand, if in fact you have already seen quite sizable declines and you’re not expecting any pick up, have you seen the declines -- any kind of declines on the handset side, given the inventories that you talked about, because your overall shipments are still expected to go up, yes?

Yes. Let me answer your first question first. I think in the last quarterly conference that I was making a rosy forecast for Q3. And, indeed, the demand looked very, very strong at that point, especially in the wireless communication segment. It was strong pretty much across the board. And then, maybe after a month -- a month after the conference, then the situation started to change.

And then what we observed is that the leaders and the brand-name leaders still hold on their demand, whereas the second tier and the non-brand suppliers dropped their demand forecast. Okay?

Yes.

Yes. And the -- your second question, can you repeat that a little bit?

Yes. What I was asking is the PC side you have already seen a decline. On the other segments, are you still seeing the wafer starts being reduced as you progressively move ahead, or are you seeing a certain amount of recovery?

Yes. The -- I think this question was similar to the wafer start question earlier. But right now, all the wafers that we started in -- at this time will contribute to the Q3 revenue. And therefore that situation looks quite normal.

And there are a couple of customers that slightly modified up their demand on the consumer product side. That’s the exact situation we are seeing.

Which applications in the consumer space where you are seeing this demand recovery?

On the LCD driver related.

Wonderful. And my final question, if you could also help at least qualitatively explain the utilization improvements you have seen at UMCi, and how does it differ with your overall average utilizations for the Group?

The UMCi’s utilization is very healthy. It’s more than 90% and in line with our expectation. We have more and more customers enter production in 0.13 micron and the 90nm technology nodes at UMCi.

Thank you. Thank you very much.

Thank you. And we have a question comes from the line of Ivan Goh from Dresdner Kleinwort. Please proceed.

Hi. Good evening. Can you hear me?

Yes.

Okay. I have three questions fundamentally. First of all, can you give me the capacity growth in Q4 sequentially from Q3?

For the whole -- full year for 2006, we are talking about roughly 5% capacity increase from 2005. So you have the first three quarters and you should be able to get the number for Q4. But it is like in between 1 to 2% sequentially.

Okay. I think a couple of quarters ago you said that most of your CapEx will be coming up in the second half. And right now you haven’t really changed your CapEx guidance for the full year, even though, as you yourself said, the market situation has changed significantly.

How should we read into you holding onto your CapEx budget for the year? Is it because you think that we will be in -- we will be recovering very quickly or is it because you think there is no point in changing your equipment deliveries at all?

Yes, first of all, the majority of our CapEx, if not all of them, is for 12” expansion. And the current inventory correction situation does not affect our advanced technology nodes. It affected the mature nodes more. Therefore the expansion continues.

We do have more customers and more products in advanced nodes, in terms of 0.13 micron and the 90nm, entering production. So we have customers waiting for those capacities.

Okay. And my second question regards to your comment that by some time in the fourth quarter about 50% of your sales will be for 0.13 micron and below. Can you break that up by 65nm, 90nm, 0.13? Can you be more specific?

Roughly, I think 0.13 micron would be 35%. And then 90 plus 65 will be another 25%.

And just a follow up to that. When do you think your 65nm will account for about 1% of your revenues and what do you think 65nm will be by the middle of 2007?

I think, by the end of the third quarter, the revenue contribution from 65nm will exceed 1%. And as far as 2007 is concerned, it’s too early to tell.

Okay. Thank you very much.

And we will now have a question coming from the line of Mark Fitzgerald from Banc of America Securities. Please proceed.

Thank you. Just two short questions, one on the tax rate here. Is there any input you can give us for the balance of the year and for 2007?

Yes. Because of the minimum tax in Taiwan, we are expecting to pay about 5 to 10 -- 5 to 8% of net income as the 2006 tax rate.

And is that the same assumption for 2007?

We will gradually set up other ways to maybe net out at 10% over the course of the next three to five years.

Okay. And then just on the share count here, it’s down significantly. I assume that’s the buyback. Are you continuing to buy back stock?

The share decline is due to the buyback and cancellation. We actually cancelled out 5.1% shares in Q2. And as for share buyback, we’re always quite flexible. And we just completed our 11th run of share buybacks not too long ago. So it’s always one of the options.

Is there any guidance for the share count for the third quarter?

For the time being there is no change. We actually have provided detailed numbers of shares in our press release.

Okay. Thank you.

And we now have a follow-up question coming from the line of Pranab Sarmah from Daiwa Securities. Please proceed.

Thank you for taking the call. Could you give us a non-operating number for third quarter? What is the number you are looking at?

It should be in a similar range as that in quarter two.

That excludes the disposal gain, or including the disposal gain?

Everything altogether.

So about 5b?

4b to 5b, yes.

Then clarifications on the utilization rate on the second quarter. I think, if I calculate it out, it appears to be about 78% but your press says 80%. So you have some excess production?

There’s always difference -- small difference between wafer shipped and wafer out. And we calculate our capacity utilization rate based upon wafer out. And the revenue number -- or the wafer number you’ve got is wafers shipped.

So the wafer out is now holding as inventory on your balance sheet?

It could be some quarterly adjustment. It could be just the base of the invoice. So 2% is really not that big.

Okay. That’s fine. And regarding UMC Japan, do you have any thought whether you will be holding the shares or you intend to divest in some point?

There is no plan for diversification at this point.

Okay. My last question is on 200mm versus 300mm. Maybe one of your competitors has said they have seen some of the order push up, mainly on the 300mm rather than 200mm. And whereas I have seen like in your case, as you are growing quite strongly that 300m. What is that going on within the industry? It’s something like you are gaining market share on the 300mm aggressively, or how do you read on the industry trend at this point?

Well, what I can say is I think -- because we have new customers entering production and with increasing number of products entering production in advanced nodes. So that’s why the impact to our 300mm is minimal or none.

And whereas our 8” capacity are mainly for mature technology and for consumer products, a large percentage of those is for consumer products. And therefore the impact there is higher.

Okay. On the 300mm, how long you think that your initial production ramp for the new production continues? And after that I think it has to come like full throttle.

Well, it will continue for a long time because we do have new design wins and new customers.

Okay. Thank you.

And we now have a question coming from the line of Mehdi Hosseini from FBR. Please proceed.

Yes. Can you hear me now?

Yes.

Good. My name’s actually Mehdi Hosseini. I had a couple of questions, more a follow up. When I look at the ASP track at UMC, you’ve done, at worst case, flat on a sequential basis over the past maybe three, four quarters. But, generally speaking, the ASP track has been pretty much in a better shape compared to your local competitor. So I do understand the new customer and 300mm ramp. But is there anything else that I’m missing here? That’s my first question.

The second question, with your Q3 wafer shipment guidance of flat to up to 3%, is there a sensitivity here, the flat represents a worst-case scenario? And if you could help me understand what goes into that very tight guidance trend.

And then on the third -- my third question has to do with your new customers, like ATI. When would you expect their manufacturing strategy change, when -- now that we know they are going to be part of AMD? Thank you.

Just a second, please. Yes. First of all, regarding the ASP increase or the sharp increase, mainly because of the increase of advanced technology products and because several customers become ready and therefore their order came in. And, as I mentioned earlier, that’s why our 300mm load is not affected.

And regarding the volume or wafer out forecast, I think it is -- flat would be the worst case, because pretty much we got all the orders in, otherwise the lead time would not allow them to take the products before the end of the quarter.

And regarding your last question, the ATI situation, we were told by customers the AMD acquisition has no impact in near-term business for us in terms of the number of products in production or in design. It will stay the same.

And, over time, we believe the change of the landscape due to this acquisition actually will give us more opportunity because, as you noticed, the computer segment used to be a weaker segment of UMC. And now we do have more 90nm and even 80nm products entering production.

If I may just have a follow up regarding the guidance for Q3. So, if the flattish wafer shipment is a worst-case scenario, does that imply that any sustainable high inventory into the month of August would impact Q4? Is it too late to change the wafer shipments planned for Q3?

We have not been requested by any customers to hold the wafer shipment. And usually we don’t do that once the order comes in and wafers are manufactured. So I do not know how to answer your hypothetical question.

Well, I was just trying to understand if the current slow environment were to sustain for another month or so, it seems to me that it is too late to make any changes to the Q3 wafer shipment; it would impact your Q4 shipment. Would that be a fair thinking?

I would -- I don’t know how to comment either. As I said, we have not seen any customers asking us to push out the delivery.

Sure. Sure. But if they were to do it, if they were to do it, it would impact Q4 at this point, or at this juncture in Q3?

Yes. Again, that is a hypothetical question that I cannot comment on.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. And we do have a question coming from the line of Satya Kumar from Credit Suisse. Please proceed.

Yes. Hi. Thanks. Can you give us an estimate as to what your fourth-quarter capacity will be?

It will be about 1 to 2% higher than quarter-three capacity.

I was just trying to reconcile the CapEx that’s going in the capacity growth. If I look at the capacity growth over the last three quarters or so, it has been in the range of 1 to 2%. And I was noticing that your CapEx in the back half of the year will be significantly higher than the first half of the year. Is there a capacity increase -- will the rate of capacity increase show up higher in the first quarter of next year maybe?

Well, the equivalent delivery schedule may not be tied to the cash payment schedule, so most of the cash payment will happen in the second half. But the equipment delivery schedule is somewhat different.

We will try to have a steady capacity ramp throughout the year for 2006. Some of the installations may make the effective capacity only available until Q1 next year.

Okay. And one quick question here. Could you talk about your utilizations on 300mm versus the other platforms, as 300 utilization rate’s a lot higher, or in line with average?

Yes, the situation is that our 6” fab is fully loaded. Our 8” fab, the average utilization is around 70%. And for 12”, the utilization average is 90%.

That’s for the third quarter -- the coming quarter.

Good. Thank you very much.

I would now like to turn the call over to Mr. Chitung Liu for closing remarks. Sir, please proceed.

Thank you. That concludes our call today and thanks again for joining. If you have any further questions, please do not hesitate to email or call us directly.

Operator, back to you.

Thank you. Ladies and gentlemen, thank you for joining our presentation today. You may now disconnect.