聯華電子 (UMC) 2008 Q4 法說會逐字稿

Welcome, everyone, to UMC's 2008 Q4 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 session.

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

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

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

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

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 on our conference call today.

With me here are Dr.

Sun Shih-Wei, CEO of UMC and Mr.

Bowen Huang, Senior IR Manager.

I will first review our financial results for the fourth quarter and then Dr.

Sun will update our business and forward looking guidance, followed lastly with the Q&A section.

Before beginning this presentation, I would like to remind everyone of our 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 beyond Company's control.

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

Now the fourth quarter results.

For Q4 2008, revenue was TWD18.54 billion representing a 25.1% quarter-over-quarter decrease from TWD24.75 billion in quarter 3 '08 and 32.9% year-over-year decrease from TWD27.62 billion in Q4 2007.

Gross profit for the quarter was TWD1.9 billion, or 10.2% of revenue, compared to TWD4.37 billion or 17.6% of third quarter '08 revenue.

Operating loss was TWD1.17 billion or 6.3% of revenue compared to an operating profit of TWD947 million or 3.8% of third quarter '08 revenue.

Net loss was TWD23.51 billion in Q4 '08 mainly due to a net non-operating loss of TWD21.78 billion.

UMC always follows financial company standards strictly and we hope our financial report [determinedly] reflect the Company's overall financial status.

The net non operating losses of TWD21.78 billion, in Q4 '08, we can separate into three main parts.

First, under the impact of global financial crisis, we recognize investment loss of TWD12.32 billion, and other than temporary losses, our financial assets of TWD2.82 billion pursuant to ROC GAAP, SFAS number five and SFAS number 34, respectively.

Secondly, the impairment loss of goodwill and idle assets totaling TWD4.07 billion were recognized pursuant to SFAS number 35.

Lastly, the loss on decline in market value of inventories, TWD2.68 billion, was recognized pursuant to SFAS number 10.

However, UMC had net cash inflow of TWD10.93 billion during Q4, since all of the aforementioned non-operating losses were non-cash charges.

Loss per ordinary share for the quarter was TWD1.81 per share and loss per ADS was $0.276.

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

Now let me turn the call over to Dr.

Sun, and he will provide you with UMC's business update and outlook for the first quarter of 2009.

Okay, thank you, Chitung, and welcome to our quarterly conference call today.

It's nice to meet you -- meet everyone again on the air, and we always appreciate your participation and your interest in UMC.

First of all, I will touch base on the highlights of the Q4 operating results, then provide further details on our performance and the key activities impacting our business in Q1 2009.

The global economic recession impacted UMC significantly in Q4 '08, characterized by a sharp drop in customer demand during the quarter.

Customers still remain conservative about end market demand and are strictly controlling their purchase orders and their inventory levels.

However UMC's internal indicators have shown signs that the demand drop may have already bottomed out and we are closely watching for signs of a recovery.

In the second half of 2008, UMC took solid steps towards enhancing UMC operations, including improving production efficiency, implementing cost rationalization policies, and is streamlining human resource allocation.

Through cost control measures, we have lowered our operating break-even point to approximately 60% utilization rate.

Going forward, we will continue to enhance execution and to monitor results to look for areas that can be further improved upon.

Despite our cost control measures, UMC R&D for investor technologies remains on schedule as they're regionally planned.

Many customers are adopting our 40 nm and 45 nm technologies, with customer products currently in pilot production using low power and high performance logic processes.

In addition, we have already demonstrated high-k metal-gate technology with yielding 45 nm SRAM test products.

This is an important milestone for UMC's high-k metal-gate technology.

We are also an industry leader in 28 nm, having independently developed the foundry industry's first fully functional 28 nm SRAM chip.

These technology breakthroughs will further enhance our long term competitiveness.

UMC has independent R&D and solid manufacturing capabilities backed by a healthy financial structure and is supported through sufficient operating capital.

We will continue to strengthen the development of our advanced technologies and to follow our customer driven Foundry Solution strategy to provide customized solutions to our global foundry customers.

Now let me provide you with the guidance for the first quarter of 2009.

First, wafer shipments to decrease by approximately 40% to 42%.

Second, wafer ASP in TWD to decrease by approximately 3% to 5%.

We are still able to sustain positive cash flow generation in Q1.

We also observe weakness across the three major applications.

For 2009 CapEx budget, we will not exceed $400 million.

That's it for my report.

Now let's begin the Q&A session.

Operator, please give the Q&A instruction.

Thank you.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Randy Abrams of Credit Suisse.

Yes, thank you.

Could you talk a bit more?

You mentioned end markets, they were also going down in the first quarter, maybe talk if any end markets are falling off more or less than the average?

And when you talk about seeing some signs of orders improving, is that across end markets, or is it more specific to certain markets?

I think the answer for both questions are pretty much across the board.

Okay, and in terms of magnitude because you've had such a sharp fall in first quarter, do you think it's possible we get a double-digit sequential rebound into second quarter or do you think it's going to be a very modest roll off the bottom in first quarter?

You are correct because we dropped so much the rebound -- if you are talking about double-digit, it's possible, but Q2 is still some distance away.

It is possible, so we are -- we can discuss that in the next quarterly conference call.

Okay.

Maybe talk a bit more about the 3% to 5% decline in TWD pricing, how much of that is mix, maybe falling back more to [lagging] edge and how much is a step down with new contracts into '09, and what's your expectation for pricing this year relative to last year and even, say, relative to 2007 where pricing was more challenging?

As far as separating the data versus Q1 price erosion in the New Year, I don't have the number with me today.

As far as the 2009 pricing pressure, as you can see, today's market situation is pretty tough.

The pressure will be there, so I don't have a quantitative number with me at this moment.

Okay, and I guess just lastly if you could talk a bit about your expectations for 45 nm ramping up, whether it could be even meaningful in the second half, or do you think it's more 2010?

I think at this moment for us, 45 nm, 40 nm, in 2009 we are mostly doing pilot engineering.

As far as realizing significant revenue, I think it will be next year.

Okay.

Thanks a lot, guys.

Thank you.

Your next question comes from the line of Shailesh Jaitly from Nomura Securities.

Yes, hi.

Firstly, if you could give some more color on the CapEx of the $400 million, what proportion of that is going to be spent on 45 nm tools?

And also, if you could detail what kind of capacity growth are you looking at in 2009?

So for the CapEx, I think $400 million we mentioned this afternoon in Taipei conference.

Mostly they would be allocated to advanced technology.

Sorry your question is --?

45 nm?

Oh yes, mostly for the 40 nm for us.

And the $400 million R&D CapEx, 30%, around 30% will be R&D.

Around 60% will be for 12 inch capacity expansion.

And what kind of capacity growth are you looking at in 2009?

2009 so far in the first half, we don't plan to spend too much capacity as the quantity.

However, we are doing aggressive mix change, so we are converting some older technology to more advance the 65 nm and the 55 nm.

Okay, and Chitung, there has been talk about some rush orders coming from the consumer segment, firstly, if you could verify that?

And secondly, are you seeing that continuing?

We are, as I mentioned, in the first question, we are seeing the rush orders across the board, on all three segments.

As far as if they are going to continue, we are closely watching.

Sorry, let me get back to your earlier questions about the 45 nm capacity, and if the situation goes well, we plan to allocate to about 20% of our fab 12A site capacity to 45 nm.

I understand.

And (inaudible), if you're looking at all your product mix, would it be fair to assume that LCD drivers have pretty much fallen close to zero?

Or is there further chance of any declines there?

I don't think it will be falling to zero.

LCD driver is very important part of our offering.

I think as far as the percentage, it's maybe 5%, 6%.

Below 10%.

5% to 6% in Tokyo (inaudible), is it?

Tokyo, yes.

I understand.

Thanks, and I'll queue back for a couple of more questions.

Thanks.

Thank you.

Your next question comes from the line of Pranab Sarmah of Daiwa Securities.

Yes, thank you for taking my question.

My first question is, when you mention about your internal indicators are showing some sign of bottoming out.

What are the indicators you are monitoring out here?

Pretty much booking, billing, and rate of incoming POs.

And could you elaborate a bit about the book to bill; how much above parity at this point?

And when you saw that was above parity?

Those are the internal trending numbers.

We never normalize them with respect to the industry standard, if there is any.

But we saw clearly the early signs of rush orders improve.

Okay.

And then, a second one is, basically, on 40 nm, 45 nm process technology, how many customers are you have at this point, and how many products are on the (inaudible) phase, and what do you expect to commercialize by year end?

We are engaging approximately 10 customers.

They are, as I mentioned in the afternoon in Taipei, in both low power and high performance, we have customer products going through pilot stage, and so far, so good.

Progress is good.

I think the natural course of the new technology, what goes through the -- we call Shuttle program, many customers will have the [eyepiece], everything on a Shuttle, goes through that, those efforts, in 2009.

And when do you expect your first commercial product to start at 40 nm, 45 nm?

You mean production, or -- ?

Production, commercial production.

What is, probably, will happen -- that depends on the nature of the product.

Some will have a long, long sampling stage, etc.

Probably in the middle of this year we'll have the first small one in production.

And Chitung, could you give us a guidance on depreciation for 2009, how we should model out, and also tax guidance for 2009?

It's -- for depreciation, you will be roughly 10% lower than that of last year.

And first quarter alone, you will see quite the significant drop.

We are talking about 4% to 5% sequential drop in depreciation in Q1.

As for tax, since most of the non-operating losses I just highlighted during the earlier presentation was non-cash basis, and it hasn't been realized, so it cannot be used for a tax deduction.

And therefore, we still pay tax for '08 around 10% minimum tax, and as for '09, I think it's also safe to use 10% as the tax base.

Okay, thank you.

I'll queue up for questions.

Thanks.

Your next question comes from the line of [Patrick Lau] of JP Morgan Securities.

Hi, good evening, (inaudible).

I have two questions.

Firstly, could you please tell us how much other revenue out of revenue -- when we look at the total revenue and total shipment, we find the [ASPH] is quite different from the chart you provided.

So is that about 5% out of revenue (inaudible) thinking?

Well, every quarter, the other revenue is actually quite different, and sometimes it could be a pretty wide range.

But between 5% to 10%, that's considered normal.

Most of the other revenue are service-based, so they tend to have higher margin than the foundry business.

So it's pretty difficult to predict the other revenue.

Okay.

So for the 4Q '08, other revenue will be still 5% to 10%?

Thank you.

Yes, roughly around 5%.

Okay, thanks a lot.

And secondly, would you please give us some color about how UMC doing so good to reach 60% operating break even, say in terms of COGS and (inaudible), for example?

Yes, actually, for the second part of '08, we did lots of cost-cutting efforts, including, you mentioned, the non-depreciation COGS, improvements in the operating expense improvement.

It's a very across the board effort.

And also, depreciation [side] will start to see, as I mentioned, a pretty continuous decline in our fixed costs, and you can also tell by comparing the operating expenses quarter-over-quarter, or year-over-year.

'08 operating expenses alone were TWD2.4 billion less than that of 2007.

So those are all coming from the effort of cost reduction.

But that depreciation certainly helps a lot, too.

Okay.

So, also, CEO you mentioned about a positive (inaudible).

Would you please give us a feeling how low it is, say, below 30% or below 25%, the feeling like that?

Thanks.

I think it's all dynamic, and the reference numbers were given based upon the quarter one scenario, including ASP, etc.

But currently at 30%-ish, (inaudible) in first quarter, we are about to generate some minor positive cash flow.

So it's still positive, but not too far from break even.

Okay, thanks a lot.

This concludes my questions.

Thank you.

Your next question comes from the line of Steven Pelayo of HSBC.

Yes, firstly, on the fourth quarter non-wafer revenue, using your shipment and your ASP, it actually looks like the non-wafer revenue was up significantly, quarter-over-quarter.

Is this a new run rate for this kind of business, or -- help me understand.

I understand it is variable quarter -over-quarter, but it certainly stepped up quite a bit, quarter-over-quarter.

(inaudible) involve some delayed revenue, and we also have a very low [base] in Q4.

So that caused the ratio percentage revenue to increase, so nothing unusual for Q4.

Okay.

So maybe on the outlook, we should think about something about that level.

Okay.

On the operating expenses, you guys managed to decrease them by about 10% quarter-over-quarter in the fourth quarter.

Now, with revenues in the first quarter looking to fall at an accelerating rate, I'm just curious, how much more flexibility do you have on operating expenses?

Could they fall another 10% quarter-on-quarter?

For 2009, I agree with you.

We did lots of work in the second half of last year.

The rate of decline, though, on operating expenses will be somewhat smaller.

I was actually talking about on quarter-over-quarter basis, looking into the first quarter.

Can you flex down with your revenues very significantly in your operating expenses?

Not very substantially.

I think it will be a pretty good scenario if we can manage to have smaller absolute operating expenses in Q1 versus Q4 last year.

All right.

Last question is on the inventory write-off, TWD2.7 billion.

That's your ASP that you guys had, that's a lot of wafers.

Can you give me a little detail behind that, where that was from, (inaudible)?

(inaudible) write off wafers, it's just the value of the inventory in Q4 last year.

They also carry part of the depreciation expenses as well.

Given that the capacity utilization rate dropped significantly in Q4 last year as well as Q1 this year, per unit, per wafer, depreciation that each wafer carry, actually jumped significantly, and by comparing or benchmarking to our selling price, each wafer will have to take a revaluation of their market price.

That's where the inventory loss comes from.

Okay.

Essentially all the wafers get a different reassessment.

Okay.

Thank you.

Thank you.

Next question is a follow-up question from the line of Shailesh Jaitly of Nomura Securities.

Yes, hi.

Can you just detail the (inaudible) a bit more on the ASP, this 3% to 5% decline sequential does appear to be pretty big, and normally, if you go back in history, this kind of big line is normally accompanied with big volumes.

So, volumes are going down, there's less of the business to be had, and still there's a massive decline.

So, is it primarily the mix, or there's something else happening there?

Well, it's partially mix, and mostly price decline in the beginning of the year, when we renegotiated contracts with several customers.

Maybe our CEO can comment further.

Yes, I think it's correct.

It's a mix of product, mix shift, and also the first quarter of the New Year, usually have a larger impact on the price erosion.

And also, if you could characterize as to which loads have you seen driving more [aggressive]?

Pretty much on -- I think the high end probably got some heavier erosion of price.

I understand.

And the trend going forward, assuming that you were expecting at bottom in this quarter, does that mean that going forward you'll be a bit more aggressive on pricing as you go into second quarter?

Pricing is usually always a case by case, working with customers.

Also, it depends on that technology.

So, we don't have any strategy or policy on pricing.

I understand.

Thank you.

(Operator Instructions).

Your next question is a follow-up question from the line of Steven Pelayo of HSBC.

Yes, your gross margin outlook in the first quarter -- I understand your depreciation costs are coming down, quarter-over-quarter.

But you actually did a pretty good job on the non-depreciation part of cost of goods sold in the fourth quarter.

I guess I was surprised to see that flex so easily.

You tend to think that there is a still a fair amount of that portion that is a fixed cost.

Can you help me understand your gross margin outlook in the first quarter, and how you're able to arrive at whatever forecast you're thinking about, or range?

Well, we have some personnel rationalizations over the past few months, and as you may know that the so-called leave without pay is becoming a common practice in the [Chengdu] Science Park in Taiwan now.

So that further helps to reduce our personnel cost a little bit.

As for the first quarter outlook for gross margin, given that there will be a new accounting principle, SFAS number ten, that will actually restore the normal calculation for gross margin a little bit in our view, especially given the substantial drop in capacity utilization rate.

So all we can give today is, we can still generate positive -- or we are approaching to the cash flow break-even point, although still generating positive cash flow.

So you can use the EBITDA margin as a reference or benchmark.

Okay.

And then, maybe on the net non-operating income line, I understand you had a lot of one-time events in the fourth quarter.

How does that look as you go out into the first quarter?

That's my last question.

For the non-operating side actually, most of the internal losses on the financial assets, a lot of the stocks themselves actually, share price has shown a pretty good rebound since the day we did the impairment losses at the end of last year.

So personally, I don't expect to see any major further write-off impairment losses in Q1.

On the other hand, though, we also do not want to fail our financial assets at the larger scale.

Those financial investments in the larger scale in Q1, so there probably won't be any major capital gains either in Q1.

So pretty much even out, like zero, in Q1.

Okay.

Great.

Thank you very much.

Thank you.

Your next question is a follow-up question from the line of Pranab Sarmah of Daiwa Securities.

Thank you.

Chitung, could you give a little bit on your receivables side whether you had to take any write-off on the fourth quarter?

Not so much yet, but we are monitoring.

Most of our larger customers are still in very good shape, and smaller customers, sometimes we ask them to put in cash or some valuable asset as deposit beforehand.

So the risk is not high.

It's quite small.

Okay.

You have recorded about NTD15.5 billion investment losses on the fourth quarter.

That -- from balance sheet, from where you have deducted that one?

Because if I see your long-term investment has come down only NTD6 billion.

We have provisioned for some of the write-off, putting under the financial -- the balance sheet already.

I can send you a few more detailed answers through e-mail if you like.

Okay, so I will follow up from there on that part.

Yes, that's from me.

Thanks.

Thanks.

There are no further questions at this time.

Okay.

Excuse me, we do have a question, from the line of Steve Pelayo of HSBC.

All right, I'll sneak in a couple more, here.

I think you had said that you'd seen some rush orders across all segments, so I guess I just want to, first, make sure that I heard that correctly, all segments in European have bottomed, and is there any relative strength in one versus the other as you look out in the first quarter?

Not particularly.

(inaudible) pretty much --

(inaudible) all areas that we see some signs of recovery.

All right.

And then, when you think about the first quarter from a monthly sales perspective, how do you think about the linearity there?

It looks like (inaudible) monthly sales were a little stronger than what some people were expecting in the month of January, so I'm just curious how you're looking at it.

We mentioned earlier, also, February is probably the lowest month for us in Q1.

And March is, then, above January, is that correct?

Yes.

Okay, thank you.

Thank you.

There are no further questions at this time.

Okay, so, operator, please, we can conclude our call today.

So that concludes our call.

Thank you again for joining.

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

Now back to you, operator.

Once again, thank you for your participation in today's teleconference.

You may now disconnect.