聯華電子 (UMC) 2008 Q1 法說會逐字稿

Welcome everyone to UMC's 2008 quarter one earnings conference call.

(OPERATOR INSTRUCTIONS).

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

Web cast replay will be available within an hour after the conference has finished.

Please visit www.umc.com under the investor relations/investor event section.

I would now like to introduce Mr.

Qidong Liu, who is the Chief Financial Officer of UMC.

Mr.

Liu, you may begin.

Thank you, and welcome everyone and thank you for joining our first quarter earnings conference call.

We are hosting this conference call from Taipei.

And with me here are Dr.

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

Bowen Huang, Senior IR Manager.

Dr.

Hu will help report our first quarter results.

During today's conference call we will first review our financial results for the first quarter of 2008.

Then Dr.

Hu will provide an update for our business and forward looking guidance followed lastly, with a Q&A section.

Before we get started, I would like to remind you of UMC's safe harbor policy.

That is certain statements made during the course of our discussion today may constitute forward looking statements, which are based on management's current expectations and beliefs.

They 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 on that, let me begin with the financial review for Q1 2008.

Revenue was TWD24 billion, representing a 13.1% quarter over quarter decrease from TWD27.62 billion in Q4 2007, and a 4.2% year over year increase from TWD23.02 billion in Q1 '07.

Gross margin for the quarter was TWD3.58 billion, or 14.9% of revenue, compared to TWD5.65 billion, or 20.5% of Q4 2007 revenue.

Operating profit was TWD190 million, or 0.8% of revenue.

This is compared to TWD1.33 billion, or 4.8% of Q4 2007 revenue.

Net income was TWD206 million in Q1 '08, compared to a net income of TWD1.36 billion in Q4 2007.

EPS for the quarter was TWD 0.2 and earnings per ADS was $0.003.

You can look for more details within the financial data that the company are press released today.

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

Thank you Qidong.

Hello everyone and welcome again to our conference call, and thank you for joining us today.

As always, we appreciate your interest in UMC.

First of all, I would like to touch on the highlights and then provide further details on our performance and the key activities impacting our business.

Q1 was traditionally a slow season for the foundry industry due to inventory adjustments.

Q1 2008 added another negative invariable.

That is the NT appreciation against US dollars.

We are glad to report that even during such a challenging situation, UMC managed to have its quarterly performance exceeding the original guidance.

Wafer shipment was 12.4% down from Q4 2007.

ASP increased by 2% and then we have a minus of 3% of exchange disadvantage.

So, you [must put] all three together, you get 13% -- 13.1% down in revenue on Q4.

Our Q1 utilization was 73%.

Gross margin was approximately 15% and operating margin was 0.8%.

We are happy to see that the revenue contribution from 0.13 micron, 90 nanometer and the 65 nanometer accounted for 58% of the total revenue.

Both 90 nanometer and the 65 nanometer showed a healthy growth at 30% and 7% respectively.

In Q1 we started to see some effect for cost reduction measures that we have taken since last year.

Loss due to currency exchange was 80 -- TWD46 million, which is relatively insignificant considering UMC's business size.

Moving into Q2, we noticed the pick-up of orders and anticipate a value growth of 5%.

This was estimated using the exchange rate of TWD30.3.

Total wafer shipments will grow by 10% and the ASP will drop by 2%.

This is due to increasing volume of the mature technology nodes.

Overall utilization is expected to increase to 80% and (inaudible) utilization is higher than average.

Gross margin improved to approximately 20%.

From application point of view, communication will be even stronger followed by consumers in the main computer.

Our leading technology customers continued to prepare for production of 65 nanometer.

We, therefore, expect a continuous increase in volumes and revenues during the rest of the year.

At the year end 65 nanometer contribution will be between 10% to 15% of total revenue.

We are also working closely with early adopters of 45 nanometer and of 40 nanometer.

Most of them will be in prototype development stage this year and they have a small production volume in year end.

Finally, we are developing 32 nanometer with customers as well.

If (inaudible) help us, our collaboration with Elpida in improving the DRAM process is progressively well.

Our goal is to develop the logistic process to broaden our technology offering eventually.

The details will be disclosed at a proper time later.

Our CapEx plans for the year stay unchanged.

In Q1 we have spent about $187 million.

So, let me provide you with the guidance for the second quarter 2008; bigger shipments to increase by approximately 10 points; wafer ASP in US dollars to decrease by approximately 2 points -- 2 percentage points.

We have some currency fluctuation between minus 3% to minus 5% on revenue.

Capacity utilization rate approximately 80%, profitability -- gross profit margin is to be approximately 20% and communication segment is expected to be the strongest followed by the consumer and computer segment.

2008 CapEx budget is between $500 million to $700 million.

That is all for my report.

Now I'd like to begin the Q&A session.

Thank you very much.

We will now begin our question and answer session.

(OPERATOR INSTRUCTIONS).

And our first question comes from [Banak Sarma] of (inaudible), please go ahead and ask your question [Banak]?

Thank you for getting my question.

My first question is basically on your second quarter product mix.

Could you give a little bit of idea like how many percentage of your revenue are you expecting at 65 and 90 nanometer in second quarter, and how that is panning out with the ASP, because you have given ASP decline guidance for second quarter?

Just a second please.

And combining 65 and the 19 nanometer, the contribution would be around the 35%.

Okay, then why you see that ASP decline on second quarter?

It's because of the mix again, the volume for the mature, the technology nodes increase.

Okay.

And secondly, could you also explain a bit about your business model with Elpida, because you have two part of the business.

One is for DRAM related product and one is also technology licensing for foundry to Elpida.

How it's going to benefit you on the long term?

And in the DRAM business are you going to get similar type of returns, whatever you are normally getting at larger operations?

First of all, it's not proper to go into the detail -- the business terms yet.

However, we do have a license fee, or technology license.

And we also, we have an option to produce DRAM whenever we like to.

Okay, and last one is basically on the margin improvement on the second quarter.

I think you have given a very discerning improvement on the margin.

Could you give what would be the depreciation on the second quarter?

And how many percentage point of the margin improvement has really come from cost cutting on the second quarter?

(Inaudible) depreciation for the quarter -- for the first quarter of 2008 was around TWD9.22 billion.

That's going to be the highest point of the whole year 2008.

For the whole year 2008 we are looking for about 2% to 3% decline from that of 2007.

And the whole quarterly depreciation is going to be -- trend down slightly on a quarterly basis throughout the rest of the year.

Okay.

Yes.

And last question is the pricing on the 0.13 micron and 0.18 micron side.

You have also seen some weakness on the 8-inch fab.

(Inaudible) has also seen some weakness on the 8-inch fab [group] recently.

How do you see that pricing at 0.18 in micron in second and third quarter going forward?

Well, we don't see any meaningful drop on 0.18 micron prices.

Okay.

So, it's a normal environment.

That's what you're trying to say?

Yes, it's pretty much saturated.

Okay, thank you.

Our next question comes from Bhavin Shah of JP Morgan.

Bhavin please go ahead and ask your question.

Yes.

Qidong, you mentioned that the depreciation will trend down through the year.

And now, basically, do you have any of the CapEx for this year?

How does the trend at least look for the early part of '09?

Do you think depreciation continues to fall or stabilizes at your annual spending?

The range of decline in '09 based upon today's CapEx budget is going to be greater than that of 2008.

Right.

And just on the response (inaudible) Elpida's question, you mentioned that you have a license fee for the -- to get a license for the metal to connect.

And is there any specific -- you have an option to produce DRAM, but will there be any royalty or something to be paid in case you do exercise that option?

I am not ready to get into the nitty gritty details, but it's a good arrangement for UMC.

Right, thanks.

And on 45 nanometer you mentioned that you might have small production by year end.

What are the -- one or two most likely products that might be a bit ahead in terms of development (inaudible) on that one?

Okay, let me give you a general and a broad answer in this case; that the applications that can embrace the state of art of the technology are very few, including GPUs, cellphone and high end consumer application.

Okay.

Okay, thank you.

There are currently no more questions in the queue.

(OPERATOR INSTRUCTIONS).

We now have a question from Randy of Credit Suisse.

Please go ahead.

Yes, good evening.

Wanted to ask about the gross margin to get to 20% even with depreciation target implies pretty good savings and actually absolute costs going down.

Maybe talk about some other cost initiatives taking place and what's driving the big bounce, aside from the depreciation gain in the second quarter?

Yes, that's a good guess.

Yes, we have taken cost reduction measures, multiple of them since last year, and we started to see the (inaudible) factor since Q1 and that effect will continue.

Okay.

So, to think about through -- like after second quarter the base, do you expect an accelerated rate of cost reductions off that level, where we could see margins start to get back toward mid 20s into the back half year?

Or how do you see it progressing beyond second quarter?

I will have to wait for next quarter to answer your questions, because the market is very down.

I make the product mix of the -- the ASP mix can change.

Okay.

As I look at non-operating, could you discuss what to expect for a combination of dividends for equity sales and then interest going into the second quarter?

Well, we have several potential investments can be disposed in the open market.

And for the time being, well, we don't have any concrete plan to do in larger scale.

So, you will have to follow our announcement after every tranche of disposal.

And that's pretty much I can answer for second quarter.

As for cost reduction, I will say to see a significant jump in gross margins, there's -- this is much -- as much as we can do on the cost bedding side.

And in order to see a bigger improvement, it had to come from better top line growth, ie the revenues should flow stronger in the second half, in order to see a better profit margin.

Okay, and here two final questions, what to see if you could give an update on status of the relationship with [Ogen]?

And with the new government in Taiwan, any chance for that to open up, if you can get the stake in [Ogen] back?

Yes, unfortunately, at this point we don't have anything new to report and we are waiting for the new government to become operational after May 20.

And anyway, at a proper time we will approach the proper organizations and solicit help to address the [Ogen] issue.

Okay, thanks a lot guys.

There are currently no more questions in the queue.

(OPERATOR INSTRUCTIONS).

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

Mr Liu, please go ahead.

Thank you very much and that conclude our call today.

Thanks for joining our conference call.

If you have any further questions, please do not hesitate to contact directly.

And now back to you, operator.

Thank you for your participation in UMC's conference.

There will be a webcast replay within an hour.

Please visit www.umc.com under the investor relations investor events section.

You may now disconnect.

Goodbye.