聯華電子 (UMC) 2009 Q2 法說會逐字稿

Welcome everyone to the UMC 2009 second quarter 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 at www.umc.com under the Investor Relations Investor Events section.

I would now like to introduce Mr.

Chitung Liu, CFO of UMC.

Mr.

Liu, you may begin your conference.

Thank you and hello everyone.

Apologies for this technical delay.

We encountered some issues with the conferencing company, but let's start with our conference call.

Thank you for joining us today.

I'm Chitung and joining me today is the CEO of UMC, Dr.

Shih-Wei Sun and Mr.

Bowen Huang, Senior IR Manager.

Before we start our second quarter 2009 conference call I need to take a few seconds to go over our Safe Harbor policy.

That is, certain statements made during the course of our discussion 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 the Company's control.

For these risks please refer to UMC's filing with the SEC in the US and ROC Security Authorities.

For the second quarter of 2009, wafer shipment rose substantially to 898,000 8-inch equivalent wafers, while the utilization rate for the second quarter was up to 79%.

Revenue increased a substantial 108.8% quarter-over-quarter to TWD22.63b from TWD10.84b in Q1 2009 and decreased 10.3% year-over-year from TWD25.24b in 2Q '08.

Gross profit margin was 23.8%, with operating margin at 11.9%.

Net income in quarter two 2009 was TWD1.55b, with earnings per ordinary shares of TWD0.12.

Earnings per ADS was $0.018 for ADS.

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

Now let me turn the call over to our CEO and he will provide you with UMC's business update and outlook for the second (sic -- see presentation) quarter of 2009.

Thank you Chitung.

I would like to welcome everyone to our second quarter conference call.

We appreciate your participation and your interest in UMC.

As usual I will start with a quick overview of the past quarter.

Before we move into the Q&A session, I will give you a few of my thoughts on our status and direction.

I will then conclude by providing the third quarter guidance.

We experienced a strong customer demand in two -- second quarter of '09.

Revenue for June have exceeded last year's June figure and have returned to the level before the economic crisis.

We expect increased revenue for Q3 and will keep a close eye on the industry situation during the upcoming quarters and proceed accordingly.

I would like to add that UMC has executed well on its customer-driven Foundry Solutions approach to provide ideal solutions that meet customers' needs.

The number of new products for 65 and 55-nanometer has increased as we previously reported with revenue from this technology segment growing significantly from Q1 to Q2 by approximately 120%.

This will help contribute to our future revenue and market share for advanced process nodes.

Furthermore, numerous customers have already adopted UMC's independently developed 40-nanometer high performance logic process.

This volume production process incorporates many advanced technologies such embedded silicon germanium, laser anneal and ultra low-K.

In addition, yield optimization for ICs designed using our 45 and 40-nanometer low power process are progressing smoothly.

With regard to [20]-nanometer high-K metal gate technology development, UMC will mainly adopt the Gate-Last technology which meets our customers' needs for both high performance and low power technologies at advanced nodes.

We have decided to increase CapEx spending as well for 2009 to $500m.

This amount will mainly be used to expand the 65/55, 45/40 and the 28-nanometer production capacity and to acquire the most advanced R&D equipment.

The global economic crisis was tough for everyone in the past year.

But UMC successfully persevered.

Our management team and employees worked together through this period of economic adjustment, demonstrating commendable teamwork and execution to facilitate the Company's smooth reorganization and the human resource consolidation.

This resulted in significant improvements in operation efficiency and the cost structure.

Looking ahead, UMC will continue to improve our utilization rate and revenue while implementing cost-control measures at the same time.

We will also exercise timely CapEx spending, aggressively invest in advanced R&D and support customers' capacity needs to pursue stable, long term growth, increase profitability and maximize return on stockholders' equity.

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

Wafer shipments to increase by approximately 8% to 10%.

Wafer ASP in US dollars to rise by approximately 5%.

Capacity utilization rates approximately 85%.

Profitability, modest increase from previous quarter.

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

And 2009 CapEx budget $500m.

This concludes my comments.

Thank you again for attending today's conference -- teleconference.

We very much appreciate your continued interest and support of UMC.

We will now take your questions.

Thank you.

So operator, please we are ready to take questions.

Please give the Q&A instructions.

(Operator Instructions).

Your first question comes from the line of Steven Pelayo.

Great, thank you.

Thank you very much.

I guess my first question is really relative to your gross margins.

I understand in the earlier meeting you discussed the third quarter outlook for them to be greater than 24%.

I guess with the components of the gross margin, the cost of goods sold being so volatile with this SFAS 10, could you help us understand how you would get to that greater than 24%, what your COGS depreciation would likely be and then scoop it back into the other number?

First of all for depreciation in the third quarter, we'll show roughly about 2% quarter-over-quarter decline on second quarter.

And secondly, we do have some impact from the Article 10, Accounting Principle 10 in second quarter.

That's a reversal again from Q1 and that's roughly, I would say, in between one-third to half of our overall gross margin in the second quarter.

And in the third quarter there won't be any impact from this Article 10.

So it will be modestly increased from the second quarter level in terms of gross margin in the third quarter.

Okay.

And once again, that's with a very slight increase in the depreciation component in cost of goods sold for the third quarter.

I just want to make sure I understand that correctly.

Yes.

But third quarter you will also see some volume increase.

So overall the raw material cost etc.

will still grow in line with the wafer shipment numbers.

Okay, great.

Thank you.

Your next question comes from the line of C.J.

Muse.

Yes, hi, thank you.

C.J.

Muse from Barclays.

I had a quick follow up question for you on CapEx.

You talked about raising the budget and a partial focus on 28-nanometer R&D work.

Can you talk about your early outlook for 2010, what you think your CapEx needs will be there and how we should think about the trend in CapEx?

So our long term CapEx guideline is about 20% of our revenue.

However, as I mentioned in the afternoon conference, in the past few years, UMC has been below this guideline.

So we are trying to catch up at this moment.

And you would expect that that catch-up would continue into 2010?

To some extent, at this moment.

Thank you.

Your next question comes from the line of Donald Lu.

Hi, good evening.

A few questions here.

First is just a follow up on the gross margin question.

So how -- the Article 10 represent one-third of -- I didn't get that clearly.

Can you repeat again if you don't mind?

Roughly one-third to almost even half of the gross profit in the second quarter comes from the reversal of inventory loss in Q1.

Of the total gross profits in the second quarter.

Yes.

About one-third to half is coming from Article 1.

So that's one time if I'm correct.

Yes.

But this is actually more a factor than just how it appears.

You also have some higher cost wafers sold in quarter two which was manufactured in quarter one.

So it should offset some of the gains from the reversal.

I see.

So then --

It's very difficult to give you a exact number, but what I want to mention is part of the gross margin in the second quarter was due to the reversal of the inventory loss booked in Q1.

And there won't be such a reversal in the third quarter anymore.

As far as for the magnitude, I would say roughly one-third to half.

One-third to a half.

So the gross margin basically would remain flattish in the third quarter.

It will be moderately better than quarter two.

Moderately better.

And moderately means?

It means moderately.

Okay.

You really, you give a more -- a range for moderate, definition of moderate.

That's slightly better.

Slightly better, okay.

Fair enough.

And also Mr.

Sun just commented that your CapEx budget -- target is about 20% of revenue.

And clearly you have been under-spending so you said you are catching up.

Does that mean you are going to spend a little bit over, more than 20% to catch up?

Or you are going to just stay at the 20%?

Yes, at this moment we plan to spend more than 20% in the near future.

To catch up.

Yes.

I see.

That's fair.

And also you, UMC has shown a very significant reduction on OpEx since Q3 last year.

I just want to see whether that's sustainable, especially in the R&D line, as the, presumably, R&D burden increases with migration.

So is there a target we should use?

We do put a pretty stringent cap in terms of our operating expenses including R&D.

And in second quarter there's also some impact from the bad debt reversal from Q1.

The amount is around TWD200m.

So if you put back that TWD200m that should be the level you are expecting for the third quarter.

And I do believe our CEO will continue to monitor our operating expenses with a lot of attention.

So it will be our goal to keep the operating expenses flat.

Okay, great.

Yes, and my last question is if you look at your wafer shipment in -- based on the guidance, your wafer shipment would reach a record high level in Q3, about 988,000 wafers.

And clearly the end demand is not any better than last year.

So UMC is gaining market share, congratulations on that, but would you be concerned about overbuilding at your customers at this point?

And also what is your outlook for Q4?

Yes, this question was also asked in the afternoon.

So our thinking has been for our direct customers, the chip companies or semiconductor companies, in the past year the inventory level has been sliding down.

I think we believe the inventory reached the bottom at Q2.

And then moving forward to the second half of this year it's getting to the high season and we believe the inventory will inch up slightly.

However, it's still under control.

And our customers, they would like to, I think in general build slightly higher inventory to avoid any possible shortage of components during the high season.

However, the channel situation, either the sell through or the end demand situation, is hard for us to have a very precise control.

But overall speaking, it should be quite reasonable and our customer, they are all very careful about building excessive inventory.

As far as going even further to Q4, next year Q1, we understand there are still lots of uncertainties.

For example, we talk about the panel situation.

The pricing is inching up also, also the end demand uncertainty.

So it's a time of very difficult to make precise forecasts.

But we are quite optimistic at this moment.

Okay.

So that means you're currently looking into 4Q, the trend shouldn't be -- should be pretty -- shouldn't be too bad or should be relatively flattish.

We will report to you the Q4 situation in three months.

Okay, fair enough.

Thank you very much.

Thank you.

Your next question comes from the line of (technical difficulty).

Yes, thank you for taking my question.

I actually have a follow up to the previous question.

As you look at your rolling forecast, would it be fair to say that right now Q4 shipment is going to decline compared to Q3?

We don't have that visibility at this moment.

Sure.

So let me ask you a different way.

Let's say theoretically wafer shipment were to decline and therefore utilization rate were to decline, and Q1 is seasonally down meaning that it would imply utilization rate would continue to decline two quarters in a row.

Are you concerned that this increased CapEx would exacerbate that decline in utilization rate?

Our investment for the capacity is on the leading edge.

I mentioned earlier 65 and 45.

So in these segments our market share is still having lots of room for improvements.

So it's -- and also we have mentioned earlier we are kind of trying to catch up on our investment.

The longer term economic cycle or quarter-to-quarter is kind of hard to forecast.

But we set a long term goal of 20% of revenue.

We would like to keep this pace and we are just trying to catch up from the past two years.

Sure.

So to that extent -- that is very helpful.

So to that extent, with this market share and declining utilization rate, do we assume that the prices, the ASPs could go flat to down as you regain or as you gain more market share?

Sorry, could you repeat that again?

Sure.

So going back to my first question, as utilization rates decline in Q4/Q1, would it be realistic to assume that ASP could decline as you increase your market share?

I think there's plenty, the ASPs, there are many factors.

It depends on the technology mix and we are doing many things in 12-inch and 8-inch.

So it's really depend on many economic factors, supply demand and also UMC's specific mix.

So at this moment, I cannot predict next year's situation at this moment.

Again we'll report to you quarter by quarter the best we can.

Understood.

Thank you so much.

Thank you.

Your next question comes from the line of [Sameer Wahid].

Hello, can you hear me?

Yes, yes please.

Okay.

Thanks for taking my call.

My question is really regarding your CapEx spending.

Sorry if I have already missed this, but could you please clarify if your increase in CapEx spend is for incremental capacity introduction or for upgrading current capacity?

I'm not sure exactly.

The capacity expense, for this year we are increasing from previous guidance that was below $400m to $500m.

That consists of 82% on 12-inch.

It includes both capacity expansion and additional R&D procurement and 18% on the 8-inch upgrade of equipment.

So this 18% on the upgrade of equipment would that include mostly technology upgrading to immersion then?

Sorry, let me try to do it again.

8-inch includes 18%, 12-inch 82%.

So that includes certainly some (inaudible).

It's across the board.

You couldn't possibly quantify that could you?

Quantify?

The amount you'll have to spend on upgrading the tools and how much is on R&D?

No, that's -- no, it's a mix.

I don't have that number at this moment.

Okay.

Thank you for --

(Operator Instructions).

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

Yes, if I can go back to depreciation again, I think you've said that you expect total depreciation and amortization to decline about 13% if I remember that correctly next year.

If I remember that correctly.

I guess in order for that to happen, it would mean even the decline turns in your cost of goods sold.

So once again I'm really trying to understand about the manufacturing depreciation, the part in cost of goods sold is going to trend over the next few quarters or so.

Again, the whole year '09 will be about 9% down from previous year.

And next quarter we are expecting about 2% decline over this quarter.

Okay.

I'm struggling to get to that lower number.

Alright, I'll contact you afterwards then.

Thank you.

Okay.

(Operator Instructions).

Your next question is a follow up question from the line of Donald Lu with (inaudible).

Yes, Chitung, I just want to -- can you tell us the tax rate we should use for Q3 and Q4 because it has been a little choppy?

At this kind of profitability it's difficult to give you a ratio.

Basically you should still use roughly 10%.

It could be slightly higher given the expiry -- expiration of some previous tax credits.

So it could be higher, a little bit higher than 10%.

Okay.

So we should use 10% in the -- a little bit higher than 10% in the second half this year.

Yes.

How about next year?

Eventually we will get down to 10%.

And in the interim it depends how much profit we can gain to offset the previously recognized tax credits.

If the tax credit was not used and expired, we need to recognize that expense in that current year.

Okay, I see.

So basically 10% is the --

Is the minimum.

The minimum tax.

Yes.

And it could potentially be a little higher than that.

Yes.

Okay, great.

Thank you.

(Operator Instructions).

Your next question comes from the line of Patrick Ho with Stifel.

Thanks a lot.

Can you just discuss your yields right now at the 4X technology node and how that's progressing?

You mean the 40/45 nanometer yield status?

Yes.

We mentioned earlier again in the conference if you plot the effect density improvement curve and overlap that with the previous generations this 45/40 nanometer node is actually no difference from the previous node.

So at 40-nanometer high performance node we have multiple customer products in production in our Tainan 12-inch fab.

So I can say it's progressing quite smoothly at this moment.

How much do you expect it to be a percentage of your revenues by year end?

By year end about 2%.

Great, thank you.

Operator, we will take one last question please.

(Operator Instructions).

There are no further questions at this time.

Okay.

So with no further questions we will conclude our call today.

Thank you for joining us.

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

And 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.