聯華電子 (UMC) 2007 Q3 法說會逐字稿

I would like to welcome everyone to UMC's third-quarter 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the presentation, there will be a question-and-answer period.

Please follow the instructions given at that time if you would like to ask a question.

For your information, this conference call is 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 through Tuesday, January 1st, 2008.

Also, a telephone replay of the call will be available from 10 AM New York time and will run until midnight on November 1st, 2007.

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 403-01-749 throughout this period.

I would like to introduce Mr.

Chitung Liu, CFO of UMC.

Mr.

Liu, you may begin.

Thank you, operator.

Hello, everyone.

This is Chitung.

We are happy that you could join us for our conference call today.

With me here are Dr.

Jackson Hu, Chairman and CEO of UMC and Mr.

Bowen Huang, Senior IR manager.

Before we begin, please bear with me for a moment.

I need to go over the standard 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 filings with the securities authorities in the U.S.

and in the [ROC].

First, let's start with our performance for the third quarter of 2007.

For this period, our revenue was NT$31.03 billion, which is an increase of 23.6% compared to $25.1 billion last quarter.

Year over year, revenue decreased by 11.4% from NT$27.85 billion in third quarter 2006.

Gross profit for this quarter was NT$8.22 billion or 26.5% of revenue compared to NT$4.96 billion or 19.8% of revenue from second quarter of 2007.

Operating profit was NT$4.24 billion or 13.6% of revenue compared to NT$1.23 billion or 4.9% of second-quarter 2007 revenue.

Net income was NT$9.23 billion in third quarter 2007 compared to a net income of NT$4.91 billion in 2Q '07.

EPS for the quarter was NT$0.57 and earnings per ADS were US$0.088.

The [bulk out] of numbers highlight of UMC's financial performance for the last quarter.

You can view more details on our quarterly report, which has been posted on our website.

Now let me turn the call to Dr.

Jackson Hu to provide a closer look for our business update and guidance for the next quarter.

Jackson, please.

Welcome to our quarterly conference call today.

It is nice to meet everyone again on the air and we always appreciate your participation and your interest in UMC.

First of all, we had an excellent quarter for Q3 2007.

Our overall performance exceeded our guidance including revenue, gross margin, operating margins, wafer shipment, loading, and other key indicators.

It is worthwhile to note that overall wafer shipment exceeded a 1 million 8-inch equivalent for the quarter.

This was a UMC record high.

Certainly the strong seasonal demand in Q3 was a main contributor.

The facts that both 12-inch [fabs] had an average loading of 95%, clearly indicated that for the product mix and the customer mix were ideal to take full advantage of the strong demand.

In the meantime, we must also point out that although revenue was impressive, it did not reach historical highs due to price pressure in both material 8-inch and advanced 12-inch properties.

This is a clear indication there is now too much competition within our industry.

In Q3, we completed Taiwan's largest ever capital reduction plan by canceling 30% of UMC's outstanding shares while returning NT$57.3 billion to shareholders.

Our cash position after the capital reduction remains very healthy.

On the other hand, UMC continues to reconstruct its balance sheet to improve capital utilization and ROE or return on equity.

Also worthwhile to mention, in Q3, we signed a technology cross license and joint development agreement with Elpida.

This is a significant development that gives us access to their DRAM technology, which we can offer as part of our SOC solutions for memory intensive applications.

Furthermore, we will jointly develop with Elpida an emerging PRAM technology or phased change memory for future SOC design.

As the process of [scaling] continues, multiple systems can be integrated in the future.

The ability to integrate various system memories will become very important in the future.

Another topic which the industry should be interested in is our CapEx for 2008, which will be significantly reduced relative to 2007 for the following reasons -- first, we have found a way of enhancing productivity for certain critical and capital intensive equipment, such as the scanner.

Second, our capacity expansion is mainly focused on converting capacity from older generations to more advanced processes.

For example, from 0.13 micron to 65 nanometer.

Third, the CapEx will be able to support higher revenue growth if 2008 is a strong demand year.

From now on, increasing profitability will be UMC's number one business objective.

However, I must remind you that this goal will not happen overnight.

A solid beginning will be the implementation of a disciplined CapEx strategy.

Now let me provide you with the guidance for the fourth quarter 2007.

Wafer shipments are expected to decrease by approximately 9%.

Wafer ASP in U.S.

dollars is expected to decrease by approximately 1%.

By the way, these are normal seasonal adjusted in our opinion.

And also, for the factors that are not under our control, for example, the exchange rate is not considered here.

The capacity utilization rate will be approximately 85%.

As for profitability, gross profit margins will be approximately 25%.

The percentage of revenue from 90 nanometer and below will be approximately 25%.

The consumer segment is expected to be the strongest, followed by communications segment and the computer segment.

Our 2007 CapEx budget will be approximately US$1 billion.

That's all for my comments.

Thank you again for attending today's teleconference.

Now let's see about questions you have about UMC.

Operator?

(OPERATOR INSTRUCTIONS).

Randy Abrams, Credit Suisse.

Good evening.

I wonder if you can give us an update on your expectation for the 65 nanometer ramp over the next few quarters.

We have many 65 nanometer customers and the total will probably be close to twenty 65-nanometer products at various stage of [URE] introduction and others are prototyping in other stages.

So they will go into production as time goes by.

And the highest volume, high volume will occur after Q2 next year.

Okay.

Maybe quantify it in terms of percent of revenue, how quick and maybe metrics on getting to 5 or getting to 10% of revenue from 65 (multiple speakers)?

In the fourth quarter, you will be around 4%.

Okay, thank you.

On your CapEx, your utilization reached 95% you were mentioning last quarter.

Do you worry about leaving some business on the table next year?

You mentioned a strong growth year.

Just want to see if CapEx is down significantly, how much can you grow your capacity next year?

As I mentioned earlier, the main objective for next year is to convert the capacity mix so that we can satisfy customers' needs.

An example is converting a large chunk of 0.13 micron capacity into 65 nanometer, which will have higher ASP.

So we will be able to support a very high growth rate next year, even close to or about 25% if 2008 turns out to be a strong year.

And one last question.

Could you maybe talk about what's driving -- you had a strong third quarter so it might be a higher base, but what's driving a bit more of a sequential decline in fourth quarter relative to some of your peers?

And how does that set up for first quarter if you have a lower base in fourth quarter?

do you still see a seasonal decline -- say high single digits first quarter -- maybe a range for that?

It's too early to talk about Q1 next year, but for Q4, we see a normal adjustment probably across the board in the computer, communication and consumer segment.

Thanks a lot, guys.

William Dong, UBS.

Quick question on the CapEx side.

I understand that there's a plan to significantly cut CapEx for next year.

But I think in terms of strategic planning for the future technology development, I just want to get your sense of what is to plan on 45 and how do we progress from here.

Good question.

45 nanometer, we are producing the first product for our customer.

It is in 12A, our 12-inch fab in Tainan.

And we have several other customers that are doing prototype preparation in the test chip as well.

So will the sort of slowdown in CapEx affect your ramp or is it actually not -- it will not affect your ramp?

Probably not; it will not affect the ramp.

We estimate the volume for 45 nanometer next year will be limited.

Thank you very much.

Shailesh Jaitly, Nomura, Singapore.

Firstly if you could help explain the utilization difference between say your 12-inch fab versus your 8-inch capacity?

In which quarter?

In the just past quarter, 3Q.

In the past quarter, 3Q?

Yes.

The 12-inch actually is slightly better.

Was slightly better than 8-inch.

Yes, that's what I was trying to understand because when I look at your revenue by process geometry, I noticed that your growth in the highland processors is a lot faster as compared to the matured processors, whereas when I look at pretty much all your competitors, it is the reverse of that which has occurred.

So could you help reconcile this major difference as to what product segments are really driving your higher end of the products?

Okay.

In Q3, actually, applications demand for advanced process technology is -- was strong across the board, including communications and computers, graphics chips and consumers.

So a referenced [speaker] is that you can find in our published report that 90 nanometer and below accounted for 25% of our revenue and 0.13 accounted for 23%.

So totaling those three, 0.13 micron below accounted for about 48% of our overall revenue.

I understand.

Also, could you help provide some estimates of the development costs which are going to be required for your 45 nanometer as compared to same like-like costs for 65?

We don't have that number on top of our head.

And actually, the more expensive equipment needed for 45 nanometer is a merchant scanner.

And beyond that, I could not think of any special equipment that are much more expensive than 55 nanometer generation.

Taking a different side, would it be fair to assume that your 45 nanometer development costs, the process development costs, is a lot higher because when I speak to the industry participants, the numbers that come across are as high as 800 million.

So just trying to understand that massive reduction in CapEx versus the need to migrate to 45 nanometer, how would you reconcile these two differing needs?

For your information, the development of our 45 nanometer technology is progressing very, very well, and we have old R&D equipment needed.

So I don't think it has anything to do with the -- or it has not much to do with the CapEx, yes.

Everything has been factored in including the R&D equipment.

I understand.

One last question if I may.

You mentioned about the capacity conversions which you are targeting, 0.13 micron to 65 nano.

If you could help provide some CapEx estimates, talk [emerging say a] standard have a 30,000 wafers per month, how much CapEx would be required and how much time would be required to convert say 0.13 micron to 65 nano?

It has been progressing for a while and I think within two quarters, most of the conversions will start to become effective.

So that we can take advantage of a strong demand in Q3.

And how much will it cost you two quarters free to migrate and how much will it cost you (multiple speakers)?

We will have to discuss that information in the next quarterly conference when we provide more detail to CapEx information.

Understand that.

I appreciate for your answers.

Thanks a lot.

Pranab Sarmah, Daiwa Securities.

Thank you for taking my questions.

First I have questions on some financial numbers.

Can you give us your non-operating guidance for fourth quarter?

And also the depreciation expenses for fourth quarter?

For the third quarter, there was NT$2 billion cash dividend income, which we will not see that again in Q4.

And also, just on the asset disposal, the share -- the share sales in fourth quarter, they will also be lower than that in third quarter.

So overall it will be actually much lower in Q4 versus Q3 in terms of net non-operating income.

And as for depreciation, we will see a minor increase in Q4 over Q3 -- low single digits.

Low single digits.

Okay.

Then, Jackson, you have mentioned about some of the critical equipment can be a [bit here high] -- productivity announcement under some of the critical equipment.

Could you identify what are the critical equipment you are talking about here?

The one example I can mention or one equipment I can mention is the scanners, which is very expensive, as you know, the basis.

Advanced scanners can cost $[50] million per piece.

So now you will be using your old scanners to migrate to a 65 nanometer from 0.13 micron.

That's what you were trying to say, right?

What we are trying to say is the existing scanners are capable of doing 65 nanometers.

The 65 nanometer.

Yes.

But when you start 45 nanometer probably from 2009, your capital intensity will again increase probably because you do not have any more scanners for 45 nanometer?

That's a good guess.

And we'll have to talk about that next year.

Okay.

And one question on the 65 nanometer, how many percentage of our revenue came in third quarter?

In third quarter is about 1%.

1%.

And in 45 nanometer, risk productions is going to start from when?

How far -- for general technology, that is I think low volt technology -- low [par] technology for general technology, when you are going to start risk production?

For 45 nanometer and low-power products, we are manufacturing the first product in the fab right now.

So I expect them to go into production probably second quarter next year.

The latest is third quarter.

And then the prototypes for the high performance products will be second quarter to have a takeout in the second quarter next year.

Thank you.

Tse-yong Yao, HSBC.

Thanks for taking my call.

First, real quick, I just wanted to confirm the gross margin guidance for Q4.

I thought I heard 25%, but the press release says 20%.

25% was correct.

No, no, 20%.

No, 20%.

Because in Q3 it was 26.5%, so it will be about 20%.

Okay thanks.

Second, just trying to get a better feel for the weakness in Q4.

I know you talked about strengthen in consumer and maybe a little bit weaker in comms and computer, but could you talk about maybe how broad-based it is?

Is it one or two customers or is it across the entire spectrum?

And then regionally, which areas are growing?

Which ones are maybe lagging behind?

Sorry.

Would you repeat your question again?

Regarding Q4 revenue guidance, you had talked about consumer -- seeing some strengthen in consumer and followed by communications and computer maybe being a little bit weaker.

Just trying to get an idea, first of all regionally, is there specific regions that are growing faster than others?

And then, the second part is kind of how broad-based it is.

Is it caused by a handful of customers or is it caused by a more broad-based industry (multiple speakers)?

I understand.

As a matter of fact, I think that we needed to collaborate on this area.

Actually, the percentage of applications in Q4 will be not too much different than Q3 -- maybe a variation of 1%, 2% for each segment.

So consumer segment is expected to be the strongest, is a relative statement, as you know in Asia, that's what is stronger.

And communications segment, probably is weaker in the United States.

And computer segment is lower mainly probably due to LCD drivers.

Hopefully that is helpful.

Okay, thanks.

I guess then next question is so talking about the capital, the greater capital discipline, lower capital spending for 2008, have you begun to see any signs of perhaps spillover in the sense that customers not being able to get capacity at say TSMC or some of the other competitors and then coming to UMC as an alternative?

You mean, when?

When?

I guess --

Or in general?

Tse-yong Yao In Q4, just generally speaking -- do you start to see any type of customers coming to you looking for capacity because perhaps they can't find it somewhere else?

Good question.

Maybe there are a couple of them.

Okay.

And the next question for me is, you are talking about converting a lot of your existing capacity for example the 130 nanometer to 65 nanometer.

I assume that this is limited to your 300 mm or your 12-inch installed base.

That's correct.

So do you have any plans to improve -- what are your -- I guess a better way to ask is what are your plans to improve productivity if you squeeze additional capacity out of your mature technology lines, your 8 inches?

That is a good question.

The answer is yes.

As a matter of fact that we see higher demand on certain mature 8-inch technology, for example like a 0.18 micron generation.

We do see a strong demand and next year, we will spend more in dollars, in absolute dollar amount for increasing the 8-inch capacity.

Okay.

Thanks a lot.

That's all for me.

Mehdi Hosseini, FBR.

Thanks for taking my question.

I apologize if I'm repeating a prior question.

I joined in late.

Could you -- I'm not asking you for guidance, but based on what you are seeing out there in terms of forecasts or volatility in the forecasts, how would you describe Q1?

Would you say is seasonal, below seasonal, above seasonal?

And then going back to the prior question you said a strength from certain areas for mature technologies; can you be more specific?

I'm not asking for a specific customer name, but in terms of end market or application, what are those applications that you are actually seeing on expected strength for these mature technologies?

Okay.

First of all, for Q1, we do not make forecasts that far out, and we don't see any signs one way or the other.

It's still a little early.

And secondly, on 8-inch technology, for example, high-voltage process, which is UMC -- one of UMC's strengths for LCD drivers for both large panel and small panel, that segment has strong demand.

Okay, I thought you said LCD driver was weak or did I misunderstood (sic) you earlier on?

I'm talking about over a broader timeframe.

Okay.

I understand.

And then in terms of the rather high-end applications, especially with some of the graphics using flip chip packaging technology, are you seeing any shortages of bumping at the back end houses?

Not really.

We see strong demand and tight supply, but not shortage yet.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

At this time there are no further questions.

I would now like to turn the call back over to Mr.

Liu.

Thank you, operator.

That concludes our call today.

Thanks again for your participation.

If you still have any additional questions, please do not hesitate to contact us directly.

Operator, back to you.

Thank you.

A link to the replay of this call will be available until the end of Tuesday, January 1st, 2008 in the "Investor Relations" section of UMC's website.

A dial-in version of the replay can be accessed by calling 888-286-8010 if you are in the U.S., or 617-801-6888 for international calls.

The dial-in replay will be available until midnight or on November 1st, 2007 New York time.

The access code is 403-01-749.

If you have any additional questions, please feel free to contact us directly.

Thank you all again and have a good day.