聯華電子 (UMC) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. My name is Jackie, the moderator for this conference call. I would like to welcome everyone to UMC's third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. This conference call is also being broadcasted 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 December 26, 2006. A telephone replay of the call will be available from 10am on October 25, 2006 until midnight on October 26, 2006, New York time. To access the replay, please call 888-286-8010, or 617-801-6888. If you are calling from outside the U.S. the access code will be 99869150. And now I would like to introduce Chitung Liu, CFO of UMC. You may begin, sir.

Thank you Jackie. Good day everyone. Thank you for joining us for a review of our 2006 third quarter results. With me here are Dr. Jackson Hu, UMC Chairman and CEO and Dr. Shih Wei Sun, UMC's Executive Vice President in charge of R&D.

During today's call we will first review our financial results of the third quarter. Then Dr. Hu will provide an update on our business and forward-looking guidance. Furthermore, Dr. Sun will spend roughly 10 minutes to provide an update on all the [different] technology manufacturing process. And then we will proceed into the Q&A session.

Before we begin, please bear me with a second while I read our Safe Harbor policy. 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 may be beyond the Company's control. For these risks, please refer to UMC's filing with the security authorities in the U.S. and also in the ROC.

Now, as you can read from our financial press issue earlier today, revenue for the third quarter 2006 was TWD27.85b, representing an 8.2% quarter-on-quarter increase from TWD25.75b in the second quarter of 2006. And also that represents an 18.1% year-over-year increase from TWD23.58b in the third quarter of 2005.

Gross profit for the quarter was TWD6.81b, or 24.5% of revenue, compared to TWD5.17b, or 20.1% of 2Q 2006 revenue.

Operating profit was TWD3.04b, or 10.9% of revenue, compared to TWD1.63b, or 6.3% of 2Q '06 revenue.

Net income was TWD8.59b in the third quarter of 2006, compared to a net income of TWD6.05b in the second quarter of 2006.

Earnings per ordinary share, or EPS, for the quarter were TWD0.48. Earnings per ADS were $0.073. This compares with second quarter 2006 earnings per ordinary shares of TWD0.34 and earnings per ADS of $0.051 per ADS.

More details are included within the financial data that accompanies the results. And we shall touch with these this morning.

I would now like to turn the call over to Jackson for an update on our business and also the outlook for our fourth quarter of the year. Jackson, please?

Thanks Chitung. And welcome to everyone who has joined us on the call today. We appreciate your participation on this call and your interest in UMC. First, I would like to touch on the highlights and then provide further details on our performance and the key activities impacting our business.

In general, we are pleased with our Q3 results. Wafer shipments increased by 1.7% and the ASP increased by 6%. As a result, revenue increased 8.2% to TWD27.85b, with operating profit improving by 86.3% to TWD3.04b.

Total sales from 90 nanometer and below reached 21% of the revenue. In Q3 we clearly saw the benefits of high utilization in our best technology nodes, which was responsible for improving our gross margin and the bottom line. Solid demand for 90 nanometer was a significant contributor to us achieving better results in the quarter.

Furthermore, the number of new 90 nanometer customers in the products in production for Q3 was still relatively small. And we have many more 90 nanometer customer products in various stages of the development that will ramp to production in the following quarters.

This validates the direction that we have followed for the last two years, that is, to focus on advanced technology development, yield enhancement and customer base extension. For example, for the 65 nanometer generation, two customers are using small-volume production and the revenue contribution in Q3 was approximately 1%.

Today, we are engaged with nine customers from a variety of sectors that include cell phone [basebands], FPGA graphics and broadband applications. Moreover, our yield enhancement for 65 nanometer has been even faster than for the 90 nanometer generation. For example, our FPGA customer is very pleased about our 65 nanometer progress. Yesterday its CEO told me that our yield has exceeded his expectations.

This is very encouraging. As you know, FPGA chips are usually very complex in processing steps and it has very large [dial] size. Its largest FPGA chip has a 40 times dial size of a typical 65 nanometer cell phone [extension].

For Q4, we do foresee some downward adjustment from certain advanced technology customers, mainly as to the [0.13] micron technology node for the communications sector. Conversely, in emerging markets such as China, the demand from other customers for handsets and the display driver applications is quite strong. This is likely due to an improvement in the inventory situation in those areas.

For the computer sector, the market appears to be anticipating the launch of Vista which has delayed the demand somewhat. Although the market climate varies, to some extent, for different customers, in general, we believe that the overall inventory situation has been improved. This can build up for the holiday season and will be essentially complete in the October/November timeframe. Customers will be monitoring the strengths of the holiday season sell through to get a clear picture for future demand. The launch of Vista will also be a significant factor.

Next I would like to provide an update on our financial guidance. Based on our current business outlook, Management's expectations for the fourth quarter of 2006 are as follows. Wafer shipments are expected to decrease by 2 to 3%. Wafer ASP in U.S. dollars is expected to decrease by 5 to 6%.

The capacity utilization rate will be approximately 75%. As for profitability, gross profit margin will be approximately 20%.

The percentage of revenues from 90 nanometer and the below geometry is expected to be over 20%.

From application point of view, the communications segment is expected to be the strongest, followed by computer segments and the consumer segment. Our 2006 CapEx budget remains unchanged, at $1b.

Now, I would like to turn the call to our Executive Vice President, Dr. Shih Wei Sun. And Dr. Sun is in charge of Central Research and Development and he will provide you an update for our most advanced technology manufacturing process.

Thank you, Jackson. And welcome again to everyone. I am Shih Wei Sun, UMC's Executive Vice President in charge of the Central R&D division. It is my pleasure to provide you with an overview on the standards and the outlook of UMC advanced technologies.

First, I would like to give you a snapshot of UMC's 90 and 80 nanometer volume production status. As of end of September this year, UMC 90 nanometer we have shipped out half of a million, 500,000 production wafers, 8 inch equivalent wafers. Today our 80 nanometer graphics process is also ready for production.

Now, let's move onto UMC's 65 nanometer technology. First, we have both high performance and low leakage 65 nanometer processes developed at UMC's 12 inch Fab 12A in Tainan, Taiwan, for fast on-site production ramp. We have also delivered a fully functioning 65 nanometer customer product back in June last year, 2005.

We have also successfully accomplished a 65 nanometer customer product qualification in March this year, 2006. So with 65 nanometer production stage reached at Fab 12A, the 65 nanometer process porting to 12 inch Fab 12i in Singapore is also executed in parallel with the excellent results. And this helps to diversify the geopolitical risk factors of our customers.

One good example of our 65 nanometer high performance process is a programmable logic product with one [party], 12 nano, which consists of 11 layers, of copper layers. And the triple off side, copper [low k]. Recently we have 3 65 nanometer products ticked out. [These series O] is the first silicon success. We believe a design for manufacturing was part of the reason behind this success.

Other than technology leadership, we also have manufacturing excellence which can be illustrated by our SRAM [ELS] stability. As of today, our 65 nanometer SRAM, that [past natural year] these are approaching 90% now.

Now let's move onto UMC's half node. I will use the 55 nanometer as an example. UMC's 55 nanometer half node shrink methodology was well formulated for optimum power, speed, performance, cost leverage and a smooth design migration from the major 65 nanometer node. Today, the 55 nanometer development has been pretty much completed, with [yearly] [inaudible] efforts on track for 55 nanometer pilot in the first half of next year, 2007.

Now let's take a look at UMC's 45 nanometer technology development. We all know 45 nanometer is a challenging technology node, with simultaneous introduction of new materials and new process modules. However, we have been smoothly executing the UMC 45 nanometer in Fab 12A to maintain a two to three-year node cycle for 45 nanometer introduction, in the second half of 2007 for the 45 nanometer low-leakage process, and in the first half of 2008 for the 45 nanometer high-performance process.

For UMC's 45 nanometer technology, I would like to give you a brief description. It offers 30% desirable shrink, 50% -- 66 [transits] to SRAM [fair size] reduction, 30% device performance again. We will use a high [M8] immersion lithography. For the high-performance part, we will adopt ultra-shallow junctions using laser [inaudible] with mobility enhancement with silicon [germanium] low-cost [strain] engineering. The back end will be ultra-low K [electric], with a K value of 2.5. So 45 nanometer development will also consider the future 40 nanometer shrinkability in the future.

Now I will spend a few minutes on UMC's design for manufacturability support portfolio. In UMC, we are doing DFM in the following five areas. The first area is on DFM design rules. The second are is on sub wavelength lithography and optical proximity correction, in other words, the litho simulation check.

The third area for us on DFM is on device second order effects. The fourth, and very important area, is on design for manufacturing design flows. The last area which is very important which is on product diagnosis. During the design phase, we would like to have a design for testing and a design for diagnosis efforts in a design phase.

So, for UMC's DFM approach, we are collaborating with [EDA] partners to provide DFM solutions for customers' specific needs. I will give a few examples on our major DFM EDA partners. First, on the litho simulation check, we have been working with Anchor, Clear Shape, Mentor, Synopsys. On chemical and mechanical polishing DFM, we have been working with Cadence. On CAA, which is the critical area analysis, we are working with Cadence and Mentor. For SSTA, statistical static timing analysis, we are working with Extreme DA and [Magnum].

Now I would like to wrap it up with a summary. First, both 65 nanometer high performance and low-leakage processes are now available from UMC 12 inch Fab 12A in Tainan and Fab 12i in Singapore for leading edge foundry products.

Second, UMC half nod approach provides the optimum power, performance, how to leverage and the design migration path, such as UMC's successful 80 nanometer and the 55 nanometer half nodes.

Third, we are collaborating with EDA partners to provide value-based DFM solutions for customers' specific DFM requirements.

And finally, we are continuing to build a world-class R&D team in Tainan, Taiwan for 45 nanometer and the 32 nanometer development, while constantly benchmarking and collaborating with [IDM] Fabless equipment EDA IP partners and their research consortia.

Thank you.

Thank you Shih Wei and all of you, again, for your attendance. Jackie, we are now ready for starting the Q&A session. Please give the instructions. Thank you.

[OPERATOR INSTRUCTIONS]. And your first question will come from the line of Shailesh Jaitly from Nomura Securities. You may proceed.

Yes. Thanks. My question relates to your immense success what you are seeing on 65 nanometer. Given that you have engagements at about nine customers, I would believe that you would need to have substantial capacity now, going forward, to satisfy the demand from these customers. So I was wondering what kind of ramp are you planning in first half of '07, particularly at the high end for 65 nanometer.

Well, our people are looking up the numbers. We expect that the CapEx detail -- CapEx expense will be at least the same amount as this year. As you mentioned, we have a significant number of customers ready to ramp in 90 nanometer. And the number of customers doing 65 nanometer design is increasing. So the CapEx will be at least at the same size as this year.

And do you think it's going to be pretty much the first half loaded CapEx, given that your capacity has been relatively flat now for a few quarters?

So, typically, the CapEx will actually be -- yes, first-half loaded due to the strong demand in the second half.

And just following up on your comments what you mentioned that there has been some guidance of downward adjustment from one of your communication customers at leading edge, and the fact that, going forward, you are expecting the communication segment to be relatively the strongest among all the three. How do you reconcile it and where are you seeing the strength coming?

I did mention earlier that we see in the emerging markets, such as China, the demand for handsets and small-sized panels is very strong actually, right now.

Small-sized panels. That is what you qualify in the comms segment?

Yes, for the China market. And we believe that the inventory situation in that market has improved a lot.

So you think they're the drivers for small panels is it?.

That is correct.

Okay. One final question on your investment strategy, because you have increased your stake in [Promos] progressively. I was wondering, do you think this is a prelude to you increasing your memory by manufacturing, given relatively good market conditions in that segment of the market?

Yes. For the time being we just try to enhance our yield or our cash pull which is actually sitting in the bank, earning about 1% interest rate. And before we get to the summit, we can pay more cash dividend or do more share buy back for cancellation or employee incentives. We do feel this is a rather attractive short-term investment opportunity, so, for the time being, purely for a cash enhancement point of view.

Chitung, does that mean that it is just a yield-accretive issue, but beyond that there's not going to be any operational changes? That means is it likely to result in you getting into more of DRAM manufacturing going forward?

For the time being, all we think about is to enhance our investment returns.

Sure. Thanks.

Thank you gentlemen. And the next question will come from the line of Mehdi Hosseini from Freidman Billings Ramsey.

Thank you. I want to go back to your comment regarding inventory corrections. Given what your customers are forecasting for wafer stocks in November and December, would you expect a Q1 wafer shipment to be better than seasonal as this inventory adjustment comes to an end by Q4 or in the Q4?

It is still a little too early to tell. Many customers do have high hopes because of the Vista launch. So I think we need more time to answer that question.

But I was under the impression that most of the inventory adjustment has been in the communications sector. So, with not such a significant new product coming in, in the communications sector, are you also seeing a reluctance to increase the stock until your customers have further [read on] demands for next year? If you could elaborate on the dynamics?

What we saw, on the inventory situation, is that in Q3 the situation is better than Q2. And, however, it is -- it varies from customer to customer. If you have a chance to read the inventory report from the semiconductor companies, you will reach to the same conclusion.

I am going -- I may have missed this. What was the utilization rate for the Singapore Fab?

For the Singapore Fab since this only produced advanced process technology in Q3, it is 90%.

Thank you.

Thank you gentlemen. And your next question will come from the line of Randy Abrams from Credit Suisse. You may proceed.

Yes, good evening guys. I wanted to see if you could talk about your CapEx ramp into fourth quarter to hit your guidance. Does that imply, first half 2007, we will see a ratchet up in the capacity, so that it accelerates a bit into first and second quarter?

Let me see how to answer your question. I mention earlier that because of our strong portfolio in advanced process technology, for 90 nanometer and the 65 nanometer, the current planning is to spend approximately to a -- or a minimum $1b in 2007. And if the demand situation stays normal, like previous years, usually we would have the equipment in, in the first half and ready for strong demand in the second half. So, I believe that's probably the best illustration of the situation.

Randy, you were asking about [inaudible] Q4. We do plan to pay out as much as $400m in cash for CapEx. So the cash payment is normally a lagging indicator versus equipment delivery. So that may [not] really tell you, in terms of the number of equipment we have in storage.

Okay. Thanks for the clarification. One other question on the R&D, it spiked up a bit in third quarter. Maybe talk about the trend over the next few quarters for R&D, and also, your SG&A expense?

Let me try to understand, you are asking the R&D CapEx trend?

Just, well R&D the expense on your P&L this past quarter it took a spike up over the second quarter. And so, whether that's -- whether we should model up a similar jump? Or what run rate for R&D expense next couple of quarters?

Yes, Dr. Sun did give a statement this afternoon, saying that the spending for R&D is quite concentrated on one node and [fluctuating] with the other node. And I didn't have a chance to look into the break down of the R&D expense for Q4. We do have a surge in 45 nanometer for the [mask spot] in Q4. But I think if any --

That's correct the mask also comes in sometime with the customers R&D projects, so it will fluctuate. So we will continue to monitor the trend in the next few quarters.

I think for Q1 it's a bit difficult to predict, but the numbers shouldn't be too different from the Q4 numbers.

Okay. Thanks a lot guys.

Thank you gentlemen. Your next question will come from the line of Robert Maire from Needham. You may proceed.

Yes, could you give us a little bit more idea as to your utilization across different geometries. You are talking about your utilization perhaps getting down to 75% or so next quarter. Would you -- and also related to that, would you expect that to be a low point, and then picking up again in the first part of next year? So, I am curious is what utilization looks like at 65 nanometers, 90.13 is this a linear utilization? Or, are we very tight at the leading edge? Can you give us more detail please?

Yes, we typically talk about the loading base on the wafer site. So, for Q4 6 inch Fab will be still fully loaded. And for the 8 inch Fabs it will be slightly above average, which it was 75% as stated this afternoon. And then for the advanced 12 inch Fabs it we will be slightly below the average.

Okay. But, within the geometries, of more advanced geometries, are the more advanced geometries running at a higher utilization rate?

One of your competitors had talked about high utilization at the leading edge, and high utilization at the trailing edge, but perhaps lower utilization in the middle technologies. Do you see similar things? Or what are you experiencing?

We did mention that the 90 nanometer and the smaller geometry the revenue contribution will still be around 20%. And there is a reduction on 0.13 micron, which is considered as advanced process technology. And for the matured process technology the demand is actually strong, including 0.35 micron 0.18 and 0.25.

Okay. So, does that mean that advanced geometry is like 65 nanometers and 90 nanometers, or more than average or perhaps 80, 85%? While some of the older trailing edge are also at those high levels with the 0.13 being lower than average?

Yes, it would be easier to just assume that the -- for the 12 inch Fabs the utilization [units] are slightly below the average.

Okay. And the CapEx that you are talking about spending, is that across 8 and 12, or is that primarily focused on expanding the existing 12 inch capacity? Or maybe could you give us a little more detail as to the target of that spending?

It will be primarily for [what events] to 12 inch Fabs. If you want to further break this down, I would say probably 10% for R&D and close to 87% for manufacturing.

Okay. And most of that aimed at the 12 inch Fabs.

That's correct. And for 8 inch Fab it is only for maintenance.

Okay. Thank you very much.

Thank you gentlemen. Your next question will come from the line of Mark FitzGerald from Banc of America. You may proceed Mark.

Thank you. Two quick questions, the -- how much of revenue exposure do you have to these emerging markets at this point? Can you break this out, the display in handsets where you said the improving inventories are showing up?

Just a second.

And gentlemen the next question will come from Bhavin Shah from JP Morgan.

Sorry, Jackie, we haven't really answered the question for the previous gentleman.

I do apologize sir.

So, we will work on this one first. If the last gentleman calls back can you put him in front of the line please?

Yes, his line will be open.

Hello? We may have to move to the next caller first.

Is my line open, this is Bhavin Shah.

Yes your line is open.

Okay. My question was you described some of the technology [initiatives], and would you UMC be looking at any technology partner? Or would that be purely a UMC initiative?

Well, UMC has always had technology development partners, from both IDM side and the Fabless side. And it will continue to be that way.

So, for example, for SOI are you working with any specific partners?

For SOI we are working with some customer, and also some EDA partners. But from the technology side we are converging our own [proxy mass] process to SOI process, 100% [hosted] by ourselves, as of today.

And for your information, UMC developed a SOI process in the past.

We have been working with SOI for quite a few years, internally.

Okay. My second question is on the -- some signs of moderation in the industry, in terms of some of the players in new [markets], China and other countries they need to see some slowing of new investments. I am just wondering what's UMC view of that? And is there any opportunity you see for industry consolidation?

Or, for UMC to take advantage of slowing investments by some of the second tier players, just how you see the whole situation?

Are you referring to the investment into Foundry business or into Fab construction?

Into Fab construction yes, Foundry business Fab construction, yes.

Okay. I think in some of the emerging markets they finally realized that building Fab is the easier thing to do. How to build the Fab is a much tougher issue. And how to ensure technology leads to competitiveness and making profits, should they be the focuses of the new Fabs. So I always consider that a definite way [to] possible development.

Thank you.

Thank you very much gentlemen. And now, Mark FitzGerald your line is open.

Great, thank you. On your FPGA comments from your customer, does that suggest that we are going to see market share gains coming back at these next technology nodes in the FPGA markets for you guys?

I think it's better for you to ask our customers that question.

Okay. Thank you.

Next caller please, Jackie.

Yes, gentlemen, your next question will come from the line of Ivan Goh from Dresdner. You may proceed sir.

Yes, thank you. I need some clarification here. Basically you've guided for utilization to fall by 7 percentage points from 82% to 75%. But your capacity is only growing by 1% from Q3 to Q4, and your wafer shipments dropping by 2 to 3%. Is there any changes in inventory, or am I missing something here that you can help me clarify?

In third quarter, if you calculate our wafer [outs], which is used to calculate the capacity utilization rate, it's certainly greater than the wafer ship number we provide 799,000. So there was some cross-quarter shipment issue here, but not that much, it's just a little bit. So that should feed into the guidance.

Okay. It doesn't mean that you are reducing your production activity and, therefore, an indication that Q1 could be soft?

Sorry, I didn't get your question.

It does not mean that you are reducing your production capacity, and suggesting that Q1 could be a soft quarter compared to Q4 does it?

No, we are actually adding 1 to 2% new capacity for quarter four. And it will be even a little bit more in Q1 next year. So, we are actually still adding capacity, it's actually in the 55 and 90 nanometers.

Okay. Can you perhaps help by giving out what is a planned capacity installation growth into the first quarter from the fourth quarter?

Sorry, say that again please?

Can you perhaps give a guidance as to what kind of capacity growth from the fourth quarter to the first quarter on an installed basis?

Another 1 or 2%.

Okay. And just some housekeeping questions, can you give what is the non-operating item forecast for the fourth quarter? And lastly, what is the tax forecast for the fourth quarter?

Tax ratio remains the same for Q4 versus Q3. And non-operating income, if you -- it could be a [cash] dividend by then we received normally only in third quarter, the numbers should be similar between Q4 and Q3.

Thank you very much that's helpful.

Thank you gentlemen. And your next question is a follow up question from Shailesh Jaitly from Nomura. You may proceed.

Yes, if you could just help clarify the proportion of your shipments that came from LCD drivers in 3Q? And how do you expect that to change in 4Q?

In 4Q we expect it to increase our LCD drivers.

Roughly what percentage of shipments was it in 3Q?

It was 8% and it is expected to grow to 13%.

8 to 13%, and this 5% increment would it be fair to assume that quite a major chunk of that is coming from the small-panel drivers?

Yes, a chunk, a big chunk will be from the small panels.

Thank you very much, it's very helpful.

Thank you gentlemen. And you also have a follow up question from Mehdi Hosseini. You may proceed.

Yes, going back to your earlier comment regarding 45 nanometer, I have a couple of follow up questions. Did I hear you correctly that you are going to use [immersion]? And then help us understand what's your targeted capacity for 65 and 45 nanometer by the end of next year.

For 65 nanometer we will not use immersion. So for 45 nanometer we will immersion as our [inaudible]. But at the early stage of each technology node, in the beginning its just one of a kind [tours], in early phase, from that point of view. So we are having at least around 2,000 per month 12 inch capacity, even for the R&D line.

For 45 nanometer it will be mainly for R&D. And, even for 65 nanometer for this year, for example, by the end of the year the percentage of capacity will be on 2%.

How should I think about this kind of mix by the end of next year? Is that going to go into double digits, especially with 65 nanometers?

I doubt it will go into double digits.

Just one more question regarding capacity, correct me if I am wrong, I thought that your Q3 capacity, reported capacity, [stock] capacity was a little bit below prior guidance is that correct?

Yes, a little bit below about a few thousand, a few K below.

That's right. But you are keeping the CapEx the same. How should I reconcile this to? Are you going to make up for this difference in Q4, Q1 timeframe or --

It is only a few thousands difference, it's mostly a timing issue. So schedule wise there is really no change.

Okay. Thank you.

Thank you gentlemen. And your next question will come from the line of Matt Gable from Weiss Advisors. You may proceed. Matt your line is open. Hello Matt, Mr. Gable your line is open for questions.

We can move to the next one.

Okay gentlemen. At this time you have no further questions.

Okay, so I think that concludes our call today. And thank you again for joining us. If you have any further questions please do not hesitate to contact us directly. Operator, please give the closing remarks.

Thank you gentlemen. Ladies and gentlemen, a replay of the call will be available at www.umc.com under the Investor Relations/Investor Events section until Tuesday December 26, 2006. A telephone replay of the call will be available from 10am on October 25, 2006 until midnight on October 26, 2006 New York time. To access the replay please call 888 286 8010, or 617 801 6888. If you are calling from outside the U.S. the access code will be 99869150.

Again, ladies and gentlemen thank you very much for participating in today's conference. This does conclude today's presentation. You may now disconnect, and have a wonderful day.