聯華電子 (UMC) 2007 Q4 法說會逐字稿

Welcome everyone to UMC's 2007 Q4 earnings conference call.

(OPERATOR INSTRUCTIONS).

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

Webcast replay will be available within one hour after the conference is finished.

Please visit www.UMC.com under the Investor Relations section.

I would now like to introduce Mr.

Chitung Liu, CFO of UMC.

Mr.

Liu, you may begin.

Good day, everyone.

Thank you for joining UMC's fourth-quarter 2007 conference call.

We're hosting this conference call from Taipei.

And with me here are Dr.

Jackson Hu, Chairman and CEO of UMC, and Mr.

Bowen Huang, Senior IR manager.

Dr.

Jackson Hu will help report our first-quarter results.

During today's conference call, we will first review our financial results for the fourth quarter in 2007.

And then Dr.

Hu will provide an update for our business and forward-looking guidance, followed by a lottery with the Q&A session.

Before we start it, I would like to remind you of UMC's Safe Harbor policy.

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

For these risks, please refer to UMC's filing with the SEC in the US and the ROC security authority.

Now, I would like to provide a short summary of our results for the fourth quarter 2007.

Quarter-over-quarter revenue decreased by approximately 11% to NTD27.62 billion and a 5.8% year-over-year increase compared to the fourth quarter in 2006.

Gross profit for the quarter was NTD5.6 billion, representing a 20.5% gross margin.

Operating profit was NTD1.4 billion with operating margin of 4.8% for this quarter.

Net income was NTD1.4 billion, which decreased by 85% quarter-over-quarter, and decreased 76% compared to the net income in the fourth quarter of 2006.

EPS for the quarter was NTD0.16 and earnings per ADS were $0.025.

For year 2007, year-over-year revenue increased by 2.6% to NTD106.8 billion.

Gross margin and operating margin for year 2007 were 21.1% and 6.4% respectively compared to 19.9% and 5.9% in 2006.

Net income for 2007 was NTD16.96 billion, a decrease of 48% year-over-year.

The full-year EPS was NTD1.09; this is based upon the weighted average share issuance after our capital reduction.

And earnings per ADS were $0.168.

You can look for more details within the financial data and that accompany our press release today.

Now let me turn the call over to Jackson, and he will provide you with the business update and outlook for the first quarter in 2008.

Hello everyone, and welcome to our conference call.

Thank you for joining us today.

As always, we appreciate your interest in UMC.

First of all, I would like to say Happy New Year to everyone.

Then, I will touch on the highlights and provide further details in our performance and with the key activities impacting our business in Q1 2008.

Due to normal seasonality in the first two quarters, we see shipments dropping between 14% and 15% from Q4.

On the other hand, ASPs are expected to rise between 0% to 1% due to an increase in 65 nanometer shipments.

Overall capacity utilization was expected to be about 70% with contribution from 90 nanometer and the 65 nanometer products accounting for more than 35% of total revenue.

As far as the applications are concerned, we are seeing the largest seasonal correction in the communication segment followed by consumer segment.

PC-related products are seeing the smallest correction.

Capital expenditures for 2008 will be between 500 and $700 million.

The major focus of this year's spending will be to improve capacity mix for our 8 and the 12-inch production lines -- are increasing the percentage of advanced technology capacity and improving ASP.

Effective use of our capacities will give us the potential to well support customers' demand upside in 2008.

As a matter of fact, with the current capacity expenditures we can support a 20%-plus revenue increase if the demand recovers and becomes very strong.

As far as technology development is concerned, our 45 nanometer program is moving along smoothly with several customer prototypes.

We expect to see a small amount of 45 nanometer production in the second half of the year.

Our 32 nanometer development program is also on schedule.

In addition to joint development programs with our IDM and fabless customers, we continue to cooperate with many of the industry's leading research organizations, including ATDF, IME and potentially IMEC or [iMac].

Going forward, we do not rule out further technology development alliances, such as our current activities with Elpida.

With regard to employee bonuses, we will follow the prevailing industry practice in Taiwan and reserve 15% of the profit for employee bonus compensation.

Further details of this plan will be finalized in the March Board of Directors meeting.

Now let me provide you a summary of this guidance for the first quarter of 2008.

Wafer shipments are to decrease by approximately 14% to 15%.

Wafer ASP in US dollars is expected to increase by approximately 0% to 1%.

Capacity utilization rate will be approximately 70%.

As for profitability, gross profit margin will be approximately 12% to 13%.

That implies we will have a small amount of operating loss in Q1.

Percentage of 90 nanometer and below revenues will be more than 35%.

The communication sector is expected to be the weakest, followed by consumer and the computer segment.

And finally, 2008 CapEx budget is expected to be in the range of $500 million to $700 million.

That is for my report.

Now let's begin the Q&A session.

Operator?

(OPERATOR INSTRUCTIONS).

William, UBS in Taiwan.

I have a quick question in terms of the cash flow.

I think in terms of with reducing CapEx this year, are there future plans for the excess cash you'll be accumulating?

This year, we're scheduled to pay back some of the outstanding debt.

Total amount will be around NTD20 billion.

And we also plan to pay out a high portion of our dividends in the form of cash.

And therefore, we should then have too much excess cash at year end of 2008, given that currently we're holding our cash at about a little bit short of NTD40 billion.

But always, capital restructure will be important topic.

And this year, we will continue to cancel some of the trader shares on-hand.

As a matter of fact, I believe by middle of this year we're going to cancel something like 2.5% of the outstanding shares.

So that will be part of the capital restructure plan.

But I don't believe in the near-term, especially for the whole 2008, we will have too much excess cash to conduct a massive restructure.

My second question relates to -- I think you mentioned about technology licensing or partnership for future technology development.

And we know you have been working with Elpida on memory side.

Could you elaborate a bit more on how -- for one, the memory size progressing, and what--?

It is progressing very, very well as we disclosed in the press release last time that we will license the copper low-k technology to Elpida for its future generation of DRAM development.

And that process is going on very, very well.

And one other question I have was -- what is the consideration for potentially licensing from the technology from other sort of partners?

Is it because we can actually have greater economy of scale in terms of sharing the resources?

Is that the consideration?

That is definitely one key consideration.

And as you know, on the advanced technology side, it's becoming more difficult because newer materials/new equipment are constantly needed.

And therefore having the right partners with [Dell] would help us accelerating the development of our own process.

Stephen, HSBC in Hong Kong.

First one is about employee bonus.

You're saying 15% of profit.

Is that 15% of operating or net profit?

The reason I ask is you said non-operating income portion can be kind of volatile, right?

No, it will be 15% on net income.

And then talking about the 65 nanometer revenue ramp in Q1, I know you say that less than 90 is going to be 35% of the total.

Could you give us an idea of how much 65 nanometer will represent?

It will be maybe between 5% to 7%.

And could you give us a little bit of color as to the breadth?

Is this one or two products, several customers?

What sort of segment is it coming from?

It covers the three application area and several customers.

Maybe that's the best way of putting it so far.

Last question is regarding 2008 CapEx.

You're guiding 500 to 700 million.

Could you give us an idea of how much -- I think you're talking about converting 200 millimeter -- 300 millimeter converting 130 nanometer to 65, and than at 200 millimeter -- I don't remember exactly what you're converting to.

But could you give us an idea of roughly how much capacity you can convert for how many dollars?

Are you asking for the breakdown between 8 inch and 12 inch?

I guess I'm trying to get an idea of how much does it cost to convert the capacity.

I imagine it is going to be different for 300 versus 200.

Yes, that is fine.

For 200 nanometer, about 10% of the total capital spending will be for 200 millimeter.

And then for 300 millimeter, 64% is for that.

26% is for R&D.

So totally added up, 100%.

And how much capacity can you convert for this amount of money?

To answer your previous questions, for the 8 inches, we will be converting to have more capacity in the 0.18 micron category.

And totally, for the whole year, we expect probably 4% of capacity increase after the conversion with better capacity mix.

Is that 4% of 8 inch capacity?

No, total.

I guess I'm just trying to get an idea of how efficient -- how much more revenue can we generate with -- per CapEx dollar, right?

For example if you talk about new capacity, we can talk about rough rules of thumb where it would cost maybe a 300 millimeter capacity.

I'm just trying to get a rough idea of what that conversion costs.

I do not have that number on top of my head.

But as I mentioned earlier with the current CapEx spending we will have enough capacity.

And if the demand is strong and we can support up to 20% plus of revenue growth.

Adam, Credit Suisse in Taipei.

This is Randy Abrams.

Just a couple questions.

On the 90 nanometer then going to over 35% and price going up in first quarter, could you talk about the applications on the 90 nanometer as well that are going to be growing against your overall guidance?

The 35% plus is the combination of 90 nanometer and 65 nanometer.

So from that point, it covers a broad range of applications from graphics, cell phones, wireline and consumer products, so pretty much every application sector.

And on the technology license, I know there is one follow-up on that.

But could you elaborate on your thinking behind something as broad as the IBM alliance?

Do you see something like that at this stage making sense?

It's too early to comment.

But what I can say is that we are open to any good potential partners.

So you can see that we are exploring or evaluating the possibility with a very open mind.

When you look at your second quarter -- maybe it's early to look at it -- but after two double-digit or low double-digit declines, what's your view at this stage for second quarter?

Could we see a better snapback or are you still taking a cautious view in this environment?

In this environment, of course the visibility is limited.

But what we can say is our March revenue will be better than January.

So if that continues, it will be a good sign of recovery.

One last question on the non-operating line.

Do you expect to do any meaningful sales in the coming quarter?

Or just given where the market is, are you planning to hold off for now?

Probably not in the first quarter, given the current weak market condition.

But our long-term goal of divesting non-core asset will certainly continue.

And I don't think the major trend will change from the last two years.

However in the near term, we still need to monitor the opportunity.

Bhavin Shah, JPMorgan.

I just wanted to talk a little bit about the profitability and direction.

I guess [leading the] business is improving nicely, but we still not seeing any clear turnaround in profitability.

Beyond the sort of sharp drop in volume that you have to deal with given the environment and so on, what exactly do you think UMC can do to return to a pretty strong historical record that you had several years ago of very strong return on capital and so on?

Can you talk a little bit more about what you can do longer-term to become more profitable?

First of all, in the current quarter, the profitability is not shown yet, due to the increase of the increasing advanced process technology volume.

And that is the current utilization is poor.

So once the utilization improves, then we definitely would see higher ESP and the benefits of that reflected in profitability.

I think today, we announced we're going to significantly reduce the capital spending, which is the first step toward improving profitability over a long-term basis.

So hopefully, that answers your question.

And second question is on the employee bonus expensing.

If you -- let's say you don't have any expensing, if you have an operating loss, how does the full-year work out?

Is it on a full year income basis?

In other words, you will have to account for more in the second subsequent quarters, or can you just talk a little bit about how exactly it will work?

Based on our quarterly earnings basis.

So if there is no quarterly earnings, there will be no expense.

So it will be [proratedly] expense on our quarterly performance.

Pranab, Daiwa in Hong Kong.

Could you give us a little bit of idea what the pricing trend on the same technology node on first quarter?

And do you see any stability of the pricing in near future in this year?

If you looked back at the ASP of 2007 for the whole year, it's pretty much flat.

And we hope with the increasing volume of advanced processing technology production, such as 65 nanometer, and our ASP will gradually improve.

So that is as much as I can say at this point.

On advanced technology node, there were abnormally high pricing pressure in 2007.

Are you seeing any slowdown on that pricing pressure in 2008 or you think it might happen maybe in second half of '08?

Yes, the high pressure will stay there for the near term at least for the next two or three quarters.

You also had a big plan for a couple of megafabs in Taiwan.

Is there anything going on there, or if those projects are being shelved for the time being, given economic condition is not good?

Can you be more specific on which ones are you referring to?

I think you had a plan to put three big fabs in Taiwan, putting about 10 billion sort of investment over next four or five or six years?

I think you made an announcement about 1.5 years back.

I think you are referring to the Phase III and Phase IV of our 12 inch fab in Tainan.

Tainan, yes exactly.

The construction is ongoing slowly because we don't see the need to rush it and as far as the timing for moving the equipment in.

And we're also very cautious right now considering the current economic situation.

There are currently no more questions in the queue.

(OPERATOR INSTRUCTIONS).

Donald Lu, Goldman Sachs.

Can you just reiterate what is the cash dividend policy for fiscal 2007?

And also, it seems like the employee stock bonus policy in this year is going to be higher than last year.

Can you just give us idea, like how much percentage of that 15% would be in the cost of goods sold and operating expense?

To answer your first question, we will propose to the Board to pay out a very high portion of the dividend in cash.

But this is subject to the Board's approval I believe in March.

How much percent [charged to]?

A very high percentage (multiple speakers) --

Over 70%?

I cannot give you a fixed ratio.

But if you recall, last year we paid 100% cash.

But this year, we will certainly propose a very high portion as well.

Okay.

Your second question regarding employee bonus expense, as we mentioned, we will follow the industry average using 15% as a benchmark to preserve through expense the employee bonus on a quarterly basis for our '08 operation.

And that amount will be paid in actually 2009.

As for 2008 payout from 2007 earnings, this is somewhat still subject to the old practice.

And that again will be subject to the Board approval by March or April.

I have another question on this potential technology alliance.

Basically, I just want to get an idea.

Currently at 65 and 45 nanometer, what is the ballpark for the R&D expense for UMC for per each node?

And also, what kind of CapEx would be economically reasonable for each node, assuming that once you develop the technology you would have to build the capacity to keep this reasonable return?

So what would be the reasonable average CapEx?

Just a second please.

First of all, we do not have the number that you needed for the development for each node.

We can go back and recalculate that and hopefully communicate that with you later.

But what I can explain to you is that the spending on the new technology node is the result of our accumulated R&D effort.

So many people think that we may need this tremendous amount of R&D spending for each node.

But as matter of fact, it's an incremental effort.

For example, from 65 nanometer to 45 nanometer, the new equipment is the immersion scanner.

And the new technology could be -- the new material could be silicon [germanning] and shallow and yielding things like that.

Since we have a solid technology development background, so for each new node is the incremental effort and spending to us, okay?

But as I said, we can try to calculate the number going back.

And we try to divide it out between 65 and 45 and how much we have to spend.

And as far as how much capacity is needed for supporting each new node, there is also a question of design win.

And if we have [compatigy] process technology, which we do, and then we have large customers engaged with us in each application sectors, then the potential volume will improve.

And therefore the CapEx spending will be -- will be planned based on that.

However, there is another timing factor in there, right?

And as I pointed out earlier, we're seeing people skipping nodes due to the increasing complexity of the design.

So we have to gauge when is the proper timing for bringing up capacity.

So I hope that I answered your first question.

Jeffrey Toder, ABN AMRO in Thailand.

I have a few questions.

First, as you mentioned that there is some correction.

And obviously your utilization rate is dropping in the first quarter.

Would you say that's more due to macro factors or micro factors?

I believe that most of that is due to normal seasonality adjustment.

And there could be some adjusted affected by the macro factor, but it is harder to separate.

And as a matter of fact, based on the feedback from many large customers, they are cautiously optimistic about the growth for this year.

And many of them predicted single-digit growth for this year.

You mentioned earlier that your March looks better than your January.

Yes.

Could you give some indication as to either what types of products or what sectors you see the improvement in at that time?

Cell phone will increase, and hopefully the PC sector will increase.

On the CapEx, I think in last quarter's call and in the conference, you were talking about the CapEx cut in 2008 as being temporary.

In other words, you felt you had spent enough preparing for the next migration in 2007, and that would take you through into 2008.

Are you still of the same opinion, which would indicate or imply that we'd see an increase in CapEx subsequent to this year, or do you think that the reduced CapEx might be something we will see going forward?

First of all, I mentioned earlier the main purpose of this year's spending is to convert the (inaudible) mix to more advanced nodes, for example, from 0.13 microns to 65 nanometer, because many large customers are converging their product portfolio in such a way.

And as far as future spending, it all depends, depending on customers' designs, design activities.

Again, I would like to emphasize, skipping nodes is a trend.

It apparently is taking longer for customers to design their products and clarify their products.

So our capacity expansion pace should -- based on their progress.

Could you see a scenario -- I think you had a question earlier but I'm not sure if I caught the answer, which was asking what you thought your capacity at the end of the year might be, given your CapEx dollars?

It will be approximately 4% more than today's [several finance people].

Then first quarter or fourth quarter last year (multiple speakers) --

Year over year increase, yes.

Year over year 4Q or average year over average year?

The total capacity in '08 will be 4% more than total capacity in '07.

Could you see a scenario perhaps where going forward, at least for the foreseeable future, where you might be investing in moving to more advanced technology nodes but not really increasing capacity very much?

There is that possibility.

And like this year, it's exactly like that.

But the capacity mix will be improved significantly.

I have two further questions.

Your R&D in fourth quarter increased quite substantially.

I was wondering if you could give some color as to why that increased, and what you might be expecting for R&D for 2008.

I think we have more activity on 45 nanometer in Q4 2007.

And as for the overall R&D expense, in absolute dollar terms, probably year-over-year we will see a small increase from '08 to '07.

And I guess as the final question, we talked about dividend a bit.

I guess you're entering this year with a lower EPS based on your guidance.

But your cash flow seemed quite healthy.

Would you be able to pay out more than 100% in 2008 if you had high free cash flow, but your EPS wasn't as high?

I think what we did on the capital reduction is the only solution we can do, given the return in constraint in 2007.

And as I mentioned in 2008, yes, we do have strong free cash flow, but we also have scheduled debt to pay back.

And for the time being I don't foresee anything significant in the near future.

But what we will do is first of all on the cash dividends, we'll try to propose the Board with very high percentage.

And secondly, we will continue to cancel the treasury shares on-hand whenever there is an opportunity.

Excellent.

David Wu, Global Crown Capital.

Two quick questions.

Number one is, roughly what offering rates, given the current market condition and migration to higher or more advanced nodes, would you need to break even for some time in, let's say in the second half of calendar '08?

And the second one, it is a more general question.

It does appear that I guess it's no great revelation, but there only seems be one possible foundry company in tough times.

And I was wondering how UMC can improve its profitability over time, and what are the chances of holding to positive profit dollars when we have the next dip?

I think our breaking even point is somewhere between 70% to 75%.

And to answer your second question, I think the reduced or significantly reduced CapEx spending is a first step toward improving the profitability.

As you can see, hopefully with the improving capacity mix, we will have higher ASP mix and lower depreciation cost in the future.

Do you need to go to an alliance's board, as let's say the IBM alliance, where you have quite a few members in terms of reducing your R&D burden as well?

I do not want to comment on any specific name.

Again I mentioned earlier that we are evaluating different potential partners with a very open mind.

Stephen, HSBC in Hong Kong.

Just a quick question on the ASPs here.

I understand an improving mix is driving a higher blended average ASP, but I'm interested on your thoughts on a like-for-like basis, especially with what happened last year when utilization rates fell and now that they're declining again.

Are you referring to the seasonal fluctuation?

Well, I just know last year there was some fairly aggressive pricing that happened in the first half of the year as we were trying to deal with some of the excess inventories.

Now that I see shipments down double digits in a couple quarters, I figure that we do have some more excess capacity here with declining utilization rates.

What does that mean for like-for-like pricing, more on your trailing edge areas rather than just focusing on a mix richening to 65 and 90 nanometer?

I already mentioned that part of the purpose for this year's CapEx spending is to improve the custom mix for the materials that [technology nodes up].

So during the seasonal downturn sometimes lowering the prices does not necessarily stimulate the demand.

So you have to do that at a proper time.

But we are actively seeking methods to address the seasonality fluctuation.

So it's a little bit too early for me to comment exactly what [will] hopefully in the future.

But during the downturn, slow seasons that we can also improve the loading.

Can I just ask then in this type of environment, obviously you guys are being more disciplined with your CapEx plan, but it sounds like you're also looking to be more disciplined in your pricing negotiations out there.

Are you finding that your competitors are also maintaining the same discipline?

Not everyone.

Some of them yes.

Fair enough.

There are currently no more questions in the queue.

(OPERATOR INSTRUCTIONS).

Still, there are currently no questions in the queue.

(OPERATOR INSTRUCTIONS).

As there are no further questions, we will now begin closing comments.

Mr.

Liu, please go ahead.

That concludes our call today.

Thank you again for joining.

If you have any further questions, please do not hesitate to contact us directly, and now back to you, Operator.

Thank you for your participation in UMC's conference call.

There will be a webcast and replay within one hour.

Please visit www.UMC.com under the Investor Relations section.

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