聯華電子 (UMC) 2009 Q1 法說會逐字稿

Welcome, everyone, to UMC's 2009 Q1 Earnings Conference Call.

(Operator Instructions.)

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

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

Please visit our website, www.umc.com, under the Investor Relations/Investor Events section.

I would like to introduce Mr.

Chitung Liu, CFO of UMC.

Mr.

Liu, you may begin.

Thank you, Operator.

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

We are hosting this conference call from Hsinchu, and with me are Dr.

Shih-Wei Sun, CEO of UMC, and Mr.

Bowen Huang, Senior IR Manager.

During today's conference all, we will first review our financial results for the first quarter in 2009, and Dr.

Sun will provide an update for our business and forward-looking guidance, followed lastly with the Q&A session.

Before beginning with the 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, and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond Company's control.

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

For the first quarter in 2009, revenue was NT10.84 billion, representing a 41.5 quarter-over-quarter decrease from NT18.54 billion in Q4 2008 and a 54.8% year-over-year decrease from NT24 billion in Q1 '08.

Gross loss for the quarter was NT4.34 billion, or 40% of revenue, compared to NT0.8 billion, or 4.3% of 4Q '08 revenue.

Operating loss was NT7.32 billion, or 67.5% of revenue, compared to NT3.88 billion, or 20.9% of Q4 '08 revenue.

Net loss was NT8.16 billion in Q1 '09 compared to NT23.51 billion loss in Q4 2008.

Loss per ordinary share for Q1 '09 was NT0.64, and loss per ADS was $0.094.

UMC's wafer shipment for the quarter dropped to 384,000 8-inch equivalent wafers, with utilization rate to be approximately 30%.

UMC also report higher operating costs associated with the adoption of the ROC SFAS number 10, resulting in gross margin of a negative 40%.

Despite these factors, UMC remained financially solid in Q1, maintaining positive free cash flow of NT2.18 billion and a cash equivalent at NT35.91 billion at the quarter end in Q1 2009.

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.

He will provide you with UMC's business update, and also this proposed acquisition of the holding company of He Jian Technology in China during our Board of Director meeting today.

Lastly, the outlook for the second quarter of 2009.

Thank you, Chitung.

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

As always, we appreciate your interest in UMC.

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

Q1 2009 was challenging for UMC due to a sharp drop in customer demand caused by the global economic downturn.

However, recent orders indicate strong demand for Q2, confirming our assessment from last quarter's conference that demand had already bottomed out.

UMC expects Q2 revenue to grow significantly with loss turning to profit.

Moreover, we are optimistic about a longer-term prospect of the foundry industry end demand growth.

As the economic uncertainties continue, we will closely watch our customers' inventory consumption, end market demands and the introduction of new applications so that we can quickly respond to any status change when necessary.

With regard to UMC's recent rush orders, we will work diligently to meet urgent order delivery for these customers.

However, our mid- to long-term capacity plans, including capacity conversion to a more favorable technology mix, 45- and 40-nanometer ramp to 12-inch volume production and acquiring the most advanced R&D equipment are all in progress and are fully capable of satisfying our customers' manufacturing requirements.

UMC's advanced R&D efforts and equipment upgrades will proceed as planned, despite economic uncertainties, to continuously improve our long-term competitiveness.

For example, we have already delivered the customer ICs, manufactured on UMC's independently-developed high-performance 40-nanometer process.

The large die-size programmable logic chips are being produced with excellent cycle time and yields.

Many other customers' 45- and 40-nanometer designs will enter pilot and a verification stage later this year, further contributing to UMC's financial performance when these designs enter volume production.

With regard to more advanced 28-nanometer process technology, and with several customers involved in the current development stage, we are progressing smoothly at UMC's R&D center in China.

For this technology node, UMC will provide low-power and high-performance Poly/SciON and [high-K metal gate] process technologies to meet the performance and the power needs of our various applications.

Recently, two global semiconductor companies, one from Taiwan and another from U.S., awarded UMC with honors of 2008 Best Fab Award and 2008 Supplier Excellence Award, respectively.

These recognitions underscore UMC's strategy of delivering customer-driven foundry solutions to create a win-win situation for UMC and its customers.

Today, UMC Board approved to propose the acquisition by UMC of the holding company for He Jian Technology for resolution at the Annual Shareholder's Meeting.

He Jian operates an eight-inch fab in Suzhou in China, with a monthly capacity of 41,000 wafers per month.

It was profitable from 2005 to 2007, and its operating performance and the financial condition remain promising.

During the past six months, the global semiconductor market suffered from the major financial crisis that led to a worldwide economic downturn.

The net value and market value of many semiconductor companies were negatively impacted.

Conversely, China's market was relatively strong during this period, attracting many customers that preferred the option of a local production.

After considering the required manpower, capital, and time to build a new fab, which would exceed one year, UMC proposed the acquisition.

In addition to realizing the value of the 15-person ownership interest in the indirect holding company where He Jian held it in trust for UMC and promoting its shareholders' interests, UMC could acquire fully built, fully staffed, and a fully operation of production base at an attractive price.

UMC further anticipates that, by focusing on customer satisfaction, the strong foundation established by He Jian in China will lead to further gains in market share.

However, completion of the acquisition is still subject to approvals from governmental authorities, the passage of appropriate resolutions of the shareholders of UMC, and the holding company of He Jian and certain other customary conditions.

After the completion of the acquisition, UMC will enhance its global competitiveness and expect to expand the potential to grow its long-term revenue and earnings.

Okay, now let me provide you with the guidance for the second quarter of 2009.

Wafer shipments to increase by more than 110%.

Wafer ASP in US dollars to decrease by less than 5%.

Capacity utilization rates, approximately 75%.

Profitability, gross profit margin to be approximately 20% positive.

The Communications segment is expected to be the strongest, followed by the Computer and the Consumer segments.

2009 CapEx budget not to exceed US$400 million.

That's all for my report.

Now, let's begin the Q&A session.

Thank you.

(Operator Instructions.)

Randy Abrams with Credit Suisse.

Yes.

Hi.

Good evening.

Could you talk about, given the 110% plus second quarter, maybe talk about outlook even beyond that?

And I know it's early, but just think about beyond that.

Do you think customers are getting to the point they're tracking consumption, and do you expect continued growth off of second quarter going into the second half?

So, for outlook beyond Q2, we will report to you next time during our conference call.

However, we think Q2, the revenue will be climbing month-by-month.

As far as the customer situation, the visibility for us is not very clear.

We are very cautious.

However, we think Q2 revenue will grow month-by-month.

Okay.

And maybe if you could characterize the 110% growth, how much do you think is coming from your existing customers coming back to order from inventory restocking?

How much, do you think any, is market share gains?

And then, are you seeing any orders from concerns on availability, just with the foundries coming back from a slow first quarter and maybe being slow to turn back on?

Maybe talk about the elements of that real strong growth.

Where do you think it's coming from?

I think -- the latter part of the question, I think our (inaudible) for our customers, I think they are all very much cautious and careful about their inventory level.

Okay, as far as how much is from inventory replenishment or others from real consumer recovery and a sustainable demand, it's hard for us to discern.

Okay.

And for the He Jian, with you announcing it today, are you getting any sense from the regulators that they're opening up a bit to allowing you to access the 15% stake and move ahead?

Like, have you gotten anything from the regulators that they're loosening up a bit?

And if you could give a quick snapshot of He Jian, how much overlap of existing customers and applications, and how much would be new for UMC?

Hi, Randy.

This is Chitung.

Basically, what we are trying to do here is to go get the authority by our shareholder meeting's approval, then we can go to the government, start the whole application process.

And the completion of the acquisition is really subject to the government approval.

For the time being, unless we get the AGM approval, the shareholder approval, it's really too early to talk about the government attitude on this issue.

And certainly, it's our own judgment that the current government, in terms of their policy, is certainly more favorable to further opening up of the restriction.

And that's part of the reason why we are willing to send this proposal to the Board, and later on to the shareholders' meeting.

And as for He Jian, the current customer, we have little knowledge about it.

But, as far as we know, it's mostly Taiwan and Chinese customers, and with focus on Driver IC, as well as MP3 ICs.

That's all we know.

We don't really think there's too much overlap, from our own judgment.

Okay.

And one final question for 40-nanometer, and you talked about the PLD starting production.

Could you talk about capacity, how much -- like what percent of your capacity you're putting in place for 40-nanometer for this year, and what's your expectation, say, by fourth quarter, how much 40-nanometer could be as a percent of sales?

Yes.

For 40-nanometer capacity, in this afternoon's conference call, we mentioned that we will increase the capacity, actually, by doubling the capacity.

The range of capacity will be between 5K to 10K.

[300 million].

And as far as the revenue, also we mentioned, for this year, we have engaged over 10 customers heavily involved on the pilot verification-qualification stage.

As far as the meaningful revenue, it will be probably next year.

Okay, thank you.

(Operator Instructions)

Bill Lu with Morgan Stanley.

Evening.

A couple of questions.

On He Jian, I'm wondering if you -- I know you said that they've been profitable, but can you talk a little more about what their budget looks like, or what their ROE looks like?

There are quite a lot of figures.

It will be difficult to go through the details now.

But, basically, they are making profit during the period of '05 to '07, and made that small loss last year because of the financial crisis, especially in the second half.

And this year, it looks like they are going to make a even bigger loss because of quarter one.

They are just in line with other semiconductor companies operating at a very low capacity utilization rate with recovery in second quarter.

And I think what we are focusing on is really how to get the synergy after the government approve the merger, and we do see they have building, marketing people, R&D people and a lot of supporting people, and it will be immediate cost savings if He Jian was merged into the whole UMC platform.

So we are actually quite keen on the potential synergy after the completion of the merger.

Okay, great.

Thanks a lot.

The second question is, if you look at the uptick in business in 2Q, 110% increasing shipments, do you have a sense as to what portion of that is coming from demand in China?

It seems like that's been a pretty big driver for a lot of the semi companies.

So, yes, not where your customers are based, but instead the end market [from] China?

Do you have a sense of that?

Yes.

Yes.

Based on our customers' feedback, even for example some US or other regions' customers are also indicating some of their uptick business are from China, for example the 3G infrastructure buildup, etc.

But, as far as exactly the quantitative distribution, we don't have the numbers.

Okay, that's really all I had.

Thank you very much.

Okay.

Your next question comes from Donald Lu with Goldman Sachs.

Yes, hi.

Yes, the first question I have is, does UMC know how much of your revenues is consumed by the China market?

And also, you commented that He Jian -- after the potential acquisition of He Jian, you'll be better positioned to serve the China market.

Can you elaborate on the strategy?

Are you going to develop more Chinese customers or offer some kind of low-cost solution, or anything like that?

Hi, Donald.

Let's answer you in a different way.

I give you a bunch of data to see if you can figure it out.

Okay.

First of all, our Communication revenue is a little bit shy of 50%.

And among that, wireline is about 70%, two-thirds.

Oh, sorry, wireless is two-thirds and wireline is one-third.

Um-hmm.

And, on the other hand, we do have our largest customer, each representing a little bit more than 10% of our revenue.

Um-hmm.

And I think you can pretty much figure it out.

And one more data point is the Driver IC currently accounting for our 8% revenue.

So, if you kind of do a simple math, you'd probably have ballpark figures in terms of final exposure to the Chinese market.

Really?

Okay.

I will have to call you after a couple of days if I can't get an answer, but thank you for the information.

That's helpful.

Yes.

And would you have any particular strategy to address, like, the China, India, the low-cost -- I mean, the emerging markets?

[Terms of] China market, we are definitely interested in mostly the local business.

For example, the Chinese system companies are thriving in this landscape of change during the global economic crisis.

They are doing quite well, especially with the stimulus programs.

So, hopefully, if the He Jian case will go through, we'll have a much closer support and partnership with them so we have a presence over there.

Secondly, state-owned projects are very attractive, also, for example the Smart Car business, metering, LED, etc.

So, that's in general, because we haven't really started any discussion with them yet.

That's just my general comments.

Okay.

Yes.

My second question is on the R&D side.

I see your R&D spending has decreased very slightly in Q1, and also from last year.

I mean, going forward, everyone is talking about the technology is getting more expensive, and also, I think that the high-end revenue probably is very hard to grow very much.

So, how would you honestly resolve this, like, [old] issue in terms of generating profitability with, let's say, going 32-nanometer and beyond?

So, from R&D point of view, our strategy doesn't change.

We will continue our independent R&D efforts.

For the recent R&D revenue, some supplies decreased, many from the buyer asking the teams to work smarter.

They should share the experiments with more carefully designed -- design of experiments, etc.

So, that's just the efficiency enhancement.

Moving forward, I mentioned a little bit about our 40-nanometer high-performance data, so we are delivering samples to customers, more the volume production are picking up, and engaging over 10 customers.

On 28, we are designing both SciON and [high-K metal gate], and even on 22 we are sending people to Albany in New York, joining the 22-nanometer development efforts with, for example, extreme EUV [probably solve a few efforts].

Since we have a bigger momentum moving already, so it's quite a self-sufficient, and we [can sell from the] effort.

Also, we mentioned the economic factor, the node-to-node volume crossover would be tracked longer, so it give us more time to make the technology available for customers, actually towards our advantage now.

Okay.

Yes.

Can you give some guidance for the operating expense and the tax, and the amount of income in second quarter?

For tax, there will be tax expenses, given that we are turning into operating profit in the second quarter.

So, certainly we will see some kind of tax.

Not much.

Probably the minimum tax in the second quarter.

And for operating side, we almost -- for sure we'll see some kind of investment loss through the UMC Japan operation because they already announced they probably will still be loss-making in the second quarter.

So, according to our ownership of 50%, and we will still recognize some investment loss through the ownership of UMC Japan.

On the disposal side, we are watching the market closely to see if there's any chance we can sell some of our non-core assets, or non-core investments, to have some profit.

But, I think, from your modeling point of view, I would suggest try to be break-even, probably more safe.

And as for operating expenses, of course our CEO, who sits right next to me, has a very strict guidance, which we have to follow internally to continue to drive the costs down, especially on the operating expenses side.

But, just a reminder that we have stopped our unpaid leave practice since March, and there's a lot of rush orders coming in.

There could be some overtime expenses, but we will try our best to keep the operating expenses at a flattish level.

Okay.

Thank you.

And my final question is on this potential new share issuance for the He Jian acquisition.

I mean, I guess that would be after the potential acquisition being approved by the shareholder meeting and the government.

Certainly.

But, for the upcoming shareholders' meeting, we will have the merger case, the agenda to be approved by the AGM, and there will be also a following agenda, which is to issue new shares in order to do the merger, also at the AGM.

So, we will, first of all, pass the agenda first, and, following the application submitted to the government, if government approves, then there will be new shares issued.

But, I just want to share with you that, if 100% of the He Jian shareholders choose to elect ADS, the dilution rate will be roughly 4%, and if 100% of them to choose common, then the dilution will be around 6%.

And in 2008 alone, UMC has canceled our treasury shares [by] more than 6.5%.

And going forward, I don't think it will be a surprise if UMC continued to practice share buyback and cancellation if our cash situation can support the practice.

Great.

Thank you.

Thank you.

[Daniel Zhou] for [Lucite] Research.

Hi.

My first question's for the Q2 110% shipment increase.

Is it concentrated mainly in certain market segments or technology nodes?

No.

Actually it's across the board.

It's quite evenly distributed.

Oh, okay.

Thank you.

My second question is it looked like, from Q4 to Q1, Communication segment declined faster than Consumer segment.

Can you elaborate a little bit more, like, on which products are mainly affected?

Probably that's related to the general landscape shift.

For example, China's stimulus program are more geared towards the Consumer segment, and that Communication is just because of the economic downturn, seems [it got hit] worse than the Consumer segment, especially from Asia and China.

Okay, thank you.

(Operator Instructions)

And at this time, there are no further questions.

Okay.

So, with no more questions, we will conclude our call today.

Thank you for joining us, and, if you have any additional questions, please do not hesitate to contact us directly.

Operator, back to you.

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.