聯華電子 (UMC) 2009 Q3 法說會逐字稿

Welcome, everyone, to UMC's 2009 Q3 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.

Webcast replay will be available within one 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.

And welcome, everyone, for joining our third quarter conference call.

With me today are the CEO of UMC, Dr.

Shih-Wei Sun and Mr.

Bowen Huang, Senior IR Manager.

Before beginning this conference call, I would like to remind everyone of our Safe Harbor policy.

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 lie beyond Company's control.

For this reason, please refer to UMC's filings with the SEC in the US and the ROC securities authorities.

Now let me begin with the third-quarter financial results.

For the third quarter of 2009, wafer shipments rose to 1.017m 8-inch equivalent wafers, with utilization rate rising to 89%.

Revenue increased 21.1% quarter over quarter to TWD27.41b, from TWD22.6b in quarter two 2009, and increase 10.7% year over year, from TWD24.75b in the third quarter of 2008.

Gross profit margin was 27.9%, with operating margin of 15.4%.

Net income in their quarter '09 was TWD6.09b, with earnings per ordinary shares of TWD0.48.

Earnings per ADS was $0.075.

Above is a short summary of the results in 3Q '09.

More details are available now in the quarterly report which has been posted on our website.

Now Dr.

Sun will provide you with an update of our business and the guidance for the fourth quarter of 2009.

Thank you, Chitung.

And thank you, everyone, for joining us today.

We appreciate your interest in UMC.

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

Then I will provide you with the guidance for the fourth quarter of 2009, before we move into the Q&A session.

The positive momentum we experienced in Q2 carried over into Q3.

Shipments surpassed 1m wafers, rising to 1.017m 8-inch equivalent wafers, the second highest number in UMC history.

Revenue for Q3 was the highest it has been for the past seven quarters, while gross profit margin increased to the highest level in five years.

UMC is optimistic about the fourth quarter and expects ASP to rise as our product mix continues to improve.

However, factors such as seasonal adjustments and appreciation of the NT dollar may slightly impact our revenue in Q4.

As a whole, UMC expects continued profitability from our foundry business and will be overall profitable for the year 2009.

Moreover, UMC intends to distribute dividends and employee bonuses next year.

Demand for advanced process nodes continued to rise in the third quarter.

Revenue from 65-nanometer and below technologies grew by more than 40% in Q3 over Q2, with further growth anticipated in 4Q.

Continuing with our customer-driven foundry solutions commitments, UMC is expanding 65 and 55-nanometer capacity at our 300-millimeter Fab 12i, and enabling the fab for 45 and 40-nanometer production capabilities.

This project will increase Fab 12i's capacity by over 30%, to better serve customers' demands for leading edge technology.

It will also allow them to mitigate geographical mix through diversification of manufacturing locations.

In addition, UMC plans to substantially increase 2010 CapEx for 45 and 40-nanometer production capacity and for continued 28-nanometer R&D equipment procurement at Fab 12A.

Furthermore, construction of Fab 12A's phase three and phase four fab complex has been completed, and we are currently implementing clean-room-related support facilities.

These 300-millimeter efforts will further expand our capacity and market share in advanced nodes, so that we may pursue stable long-term growth while increasing profitability and shareholders' return on equity.

Today, both UMC and UMC Japan, or UMCJ, Board of Director meetings approved the UMC's tender offer of UMCJ's all outstanding shares listed on Jasdaq.

UMC currently holds 50.09% issued shares of UMCJ.

Through the tender offer, UMC intends to acquire 100% stakes of UMCJ.

Upon completion, UMCJ will be fully owned by UMC, and then be de-listed from Jasdaq.

UMCJ, the sole dedicated foundry company in Japan, has been focusing on the Japanese market for many years and already established a great partnership with local customers.

UMC considers the tender offer to be beneficial to UMCJ's customers as well, as it is expected to enable UMCJ's utilization of UMC's competitive production capabilities.

We believe this merger will help UMC achieve -- improve the synergy and economy of scale to provide customers with more integrated and competitive foundry solutions on a global basis.

We also view the tender offer as a strategy to maximize the overall corporate value of the UMC Group.

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

We expect wafer shipments to decrease by approximately 0% to 3%.

Wafer ASP will rise by approximately 0% to 3% in US dollar terms.

However, appreciation for the NT dollar may have an adverse effect on revenue and profits.

Capacity utilization rate will be in the mid 80s range.

In terms of our profitability, our gross margin will be in the mid 20s range.

The consumer segment is expected to grow modestly, while the computer segment is expected to show some weakness.

The CapEx budget for 2009 remains at our previously announced $500m.

That concludes my comments.

We will now take your questions.

Thank you.

Operator, please give the Q&A instructions.

Thank you.

(Operator Instructions).

Your first question comes from Donald Lu, with Goldman Sachs.

Hi, Mr.

Sun, Chitung.

Good evening.

My first question is on UMCJ.

Can you give us an update on the potential purchasing price and also the -- in terms of price book, for example, and also the profitability of UMCJ in Q3 and Q4 this year.

Yes, our tender offer price is JPY12,500 per share, this being compared to the book value, roughly, is about JPY29,000 per share.

Our tender offer price is about 0.45 times to the book.

And in terms of the book about JPY15,000 is actually in cash, in the form of cash.

And total amount, if the 100% of the outstanding is tendered, UMC will pay up to JPY6.9b.

And the Company has a big write-down in asset value about a couple of months ago, and now their operating position is improving.

With third quarter results being announced today as well, their operating loss is about JPY500m.

And their net loss is about JPY280m.

And, going forward, we will take some time, try to generate as much synergy as possible and we don't have an outlook for Q4 yet, and UMCJ, being a listed company, so far they still have their full year forecast.

You can refer to their IR website, please.

Okay.

Thanks.

My second question is in terms of the demand outlook.

I didn't get it completely, Mr.

Sun's comment, on which sector it's for in Q4.

And also what is the -- in terms of 8-inch to 12-inch, if the 12-inch booking remains very solid, utilization at 100% into January or not?

Donald, in Q4, we were guiding consumer sector is stronger.

And I also mentioned the computer sector is showing some weakness.

Communications sector is about flat.

So the second question -- sorry, Donald, what's the second question?

I'm sorry.

Yes, my second question is we have been hearing that the 12-inch loading has been tried.

Okay, okay.

So maybe give us a color on 12 and 8-inch utilization.

Yes, moving to Q4, I think our 12-inch is still quite busy, quite high, stronger than 8-inch.

Okay.

Is 12-inch utilization in the 90% range?

Yes.

Yes.

Okay, great.

Thank you very much.

Thank you.

(Operator Instructions).

You have a question from the line of Satya Kumar with Credit Suisse.

Hi, this is [Louis Waluvi] for Satya.

You indicated that CapEx, and currently at [10], could be substantially higher, could be for capacity increase for Fab 12A, phase three and four, and also for Fab 12i.

Can you just give an idea about what you are thinking about CapEx growth year over year?

So for next year's CapEx, we will report a number in the next quarter's conference call.

However our long-term guidance for CapEx versus CapEx-to-sales ratio is 20% to 25% in the long run.

Since 2008, we have been under spending quite a bit, so we are in catch-up mode from now to 2010.

The exact number will be provided next conference call.

In terms of the expansion of capacity, 12i, which is our Singapore 12-inch fab, we mentioned in our press release that we will increase capacity by more than 30% over there, roughly from 31,000 to today to 41,000 next year, including both 65/55, and 45/40-nanometer capabilities and capacities.

And also 12A we are certainly moving forward on 45/40 expansion, also 20-nanometer technology [buys].

On phase three, phase four, the construction of the building has been completed.

We are working on clean-room-related support facilities at this moment.

So for 2010 you would expect -- can you give any idea of how the CapEx linearity is going to be, first half versus second half?

We don't have the exact number.

Next time, we will provide the details.

Okay, thank you very much.

Thank you.

Your next question comes from [Dan Malcaln] with Moore Capital.

Dan, your line is open.

Hi.

Yes.

Just on the computer segment that you talked about weakness there, what's driving the weakness in computer?

And do you expect -- are you expecting that computer will be down sequentially in the fourth quarter?

Computer is -- it depends on the definition of the computer.

For us, computer segment is showing some weakness, mainly on the driver IC segment.

Okay, driver IC for IT monitor?

TV, monitors.

TV is actually relatively better than monitor.

Okay.

Okay, but is TV in consumer or computer?

Computer.

Driver IC is in computer.

Driver IC is part of computer.

There are mainly products for TVs, but driver is in our computer segment.

Understood.

And then what's the consumer -- what's driving the consumer strength for you guys?

For example, set-top box, DTV, flash controller, etc.

Okay, great.

Thanks so much.

Your next question comes from [Arthur Chow] with AllianceBernstein.

More color on the progress of 45 into next year, are you seeing acceleration, or pretty much the same as -- in terms of your prospects of 45 versus, say, three months ago?

45/40 is definitely picking up steam.

In the past quarter, Q3, we shipped thousands of 40-nanometer wafers.

Looking to the future, next year, we are very busy.

We are engaging over 10 customers, very busy on the IT verification, qualification and product level, also running [shadow] programs.

So we expect next year will be busy for 45/40.

But in terms of a crossover with an earlier node of a 65/55, it may take some while.

And so you should get commercial production for at least probably half of those 10 customers you talked about maybe by the second half of next year?

It depends.

Every customer's progress is different.

It's not only the 45/40.

It's a complicated process and a design process, matching and collaboration.

But next year we will -- I think 45/40 will be ramping up.

At this moment we are ramping 40 for a few customers already.

Okay, thank you very much.

Thank you.

Your next question comes from Quinn Bolton with Needham & Company.

Two questions.

First, wondering if you've seen any significant wafer start cancellations or reductions in forecast from your customers.

And then the second question, was wondering what your wafer bank inventory levels you're doing.

Are your customers asking you to hold greater levels of wafer bank inventory over the last month or so?

Thank you.

For both questions, the answer is no.

We don't see any cancellations.

For us, there is almost no banking at all, at this moment.

Okay, great.

Thank you.

Your next question comes from Donald Lu with Goldman Sachs.

Just a follow-up question on CapEx and capacity.

In this year, based on your statement in your press release, your overall capacity essentially remains flat in Q1 and Q4, with the TWD500m CapEx.

So can you explain where the CapEx has been applied to?

And also with your outlook on the new clean-room buildup, what kind of a 12-inch CapEx or overall CapEx you would have by the end of next year.

For the first question, the TWD500m, most of the CapEx are happening in the second half of the year, and it's a cash-based CapEx.

So we say equipment lead time, everything.

Most of the equipment will be released for production next year.

That's probably why you see the difference.

On the second question, about the exact number of CapEx, we will provide to you next quarter.

So with the equipment you installed in the second half, what would be the capacity?

Is that -- the equipment is in 12i or 12A?

Like what kind of capacity has been added?

Okay.

So, for the capacity profile, we include many areas.

12i is certainly we are expanding, 12A I mentioned earlier, 40/45 nanometer, 20-nanometer technology.

But even some 8-inch we are kind of aggressively expanding in specialty technology areas.

So it's a mixture of many things.

Yes.

I guess what I'm trying to get to is the CapEx intensity for each 1,000 wafer per month capacity at 65, 45 or 22, do you see a major -- sorry, 28 -- what would be the CapEx intensity?

You mean the per K dollar amount?

Yes, yes.

Like how much -- is that going to increase significantly, or not significantly?

Yes.

From 65 to 45, it will increase mostly -- it also depends on the process.

For example, for the low-power process, other than the immersion scanner, the increase is less.

For the high-performance 40-nanometer, you're adding for the transistor enhancement, like the silicon-germanium laser and [that's] more.

So it's different, case by case.

But we -- that's why you are right.

We try to maximize the capital efficiency, so we try to have the better overlap between the two nodes so we can have a better continuity in the long run.

But as far as the exact dollar amount, I don't have an exact number here.

Would you see the CapEx intensity increase?

It's more like in the 10% or 20% range?

Is there a rough range?

Probably somewhere in between.

At least it's getting more expensive.

That's for sure.

Also, it's a function of if you are building a greenfield fab, it's very, very expensive.

But if you are continuing doing the technology mix, migration and conversion, with existing built-up economy of scale, then it's much less.

So it's quite different.

So we are certainly on the latter part.

I see.

Great.

And with the -- for your 12-inch fab, I think over the years the return has not been that great.

But going forward, with the new improved technology, etc., what -- is there a target for next year, end of next year, like at a fully loaded basis?

At 100% utilization, for example, with the 12-inch, are we going to improve close to that level?

So it's the end of the year, we are doing the business planning.

That's our target, to improve the 12-inch ROE.

In the past, it's not -- we are going to improve the ROE from a certain number to a better target.

That's for sure.

And also, I would like to point out that the depreciation at our first 12-inch wafer fab, 12A, has peaked this year, so at least we have the first fab depreciation will start to come down.

And the different situation will be we have two up-and-running 12-inch wafer fabs, while we are expanding the others.

So the situation should be better, compared to the first or the second fab we are ramping.

Great.

And, Chitung, what is the depreciation forecast for next year, for this one?

Overall, we are looking for about 7% to 8% year-over-year decline.

Okay.

But that's a very good point [also, yes].

We have two big 12-inch fabs operating.

Also they are both depreciating, so supporting for the future investment and improved ROE.

Great.

How is the pricing?

When the 8-inch fab was fully depreciated, I guess that was in 2005 or '06, the industry basically sees a step function of 8-inch price decline.

Do you think the 12-inch would repeat the same scenario, or it's going to be very different?

No.

For the legacy technologies, actually, the price erosion is quite stable, actually.

It's the rest now that's fast price erosion.

You mean for next year, I think both UMC and TSMC will have some 12-inch fabs start to become fully depreciated.

Yes, yes.

So the depreciation burden would be reduced for both TSMC, UMC and probably Chartered, as well.

Do you see signs that people are going to be more aggressive on 12-inch pricing next year?

Haven't seen that at this moment.

No surprises, it's negotiated on a case-by-case basis with customers.

Okay.

Great.

When they made the acquisition of UMJ and also potentially with [Huzheng], there -- it's the Company's profitability structure would potentially change?

I mean, for a certain utilization across the Company, would ROE be different in the next year or two?

First of all, we don't know the exact timing of full integration yet.

And, secondly, both are 8-inch wafer fabs and [Huzheng] probably can add on about 10% of UMC's capacity, while UMCJ is about half.

And with the 8-inch wafer facility, we are very confident to integrate both operations into our 8-inch business unit, or the 8-inch P&L division.

So we have high hopes for the result of integration.

But again, [Huzheng] depending -- it depends on the local government requirements and it also will take a few months for UMC Japan to complete the tender offer.

So it will take a while.

I think next quarter we probably will be able to present a more detailed plan in terms of integration.

Okay.

So UMCJ will add about 5% capacity to UMC?

It's about 20,000 8-inch wafers per month, and [Huzheng], again, is about 40,000 8-inch wafers per month.

Got it.

Great.

Thanks.

Your next question comes from Bill Lu, with Morgan Stanley.

Yes, hi.

I just have one question on your gross margins.

Obviously, you've done a great job of cutting costs, but I just want to figure out how much more is there to go.

So, hypothetically, if we look out a year, let's say the third quarter of 2010, you're doing the same revenues as you did -- as you just did at the third quarter of this year.

What do you think gross margins would be in that situation?

It's difficult to answer these hypothetical questions.

But I think continue to drive down costs, especially on input costs, such as raw material, power, water, etc., from our daily operation.

So we do believe there will be some room, at least, for the raw material and utility side.

However, on the manpower and other somewhat fixed expenses, we don't believe there will be too much room.

So it really depends on which part of the component you are talking about.

Overall, I do believe we will continue to drive down the cost, although the magnitude will be a lot smaller going forward.

Okay.

If I asked that a slightly different way, if I compare your cost of goods sold to your competitor TSMC's depreciation, you are probably 15% higher as a percentage of revenue versus TSM.

I think that's hard to change in the short term.

But if I look at variable costs, divided by the number of wafers shipped, you're actually doing better.

Your cost is actually lower versus TSMC's.

I mean, I guess that's positive, in that you're running efficiently, but does that also say the upside from there is limited?

Again, it's really component by component.

As I mentioned, we do believe there is still room, we can drive down the costs, especially in raw materials and other utilities, indirect raw materials, etc.

But manpower-wise, it's pretty much maxed out.

In fact, we are starting to budget the employee bonus, so this part of the cost actually has been going up since the month of September.

And, going forward, as long as the Company is expected to make profit, we will continue to accrue the employee bonus.

So this part is very difficult to go down from current level.

Okay.

I guess if you look at the increase in manpower expenses versus the utilities/materials, what would be a bigger impact going forward?

Raw material, of course, is associated with our top-line revenue, so hopefully the savings can still outweigh the increase.

So that's why I mentioned earlier we still expect to see some improvement, but with a lot smaller magnitude.

Okay, great.

Thank you very much.

Thank you.

Your next question comes from [Dan Malcaln] with Moore Capital.

Yes, just a question on the March quarter, just in terms of your visibility.

And I apologize if you answered this question already.

But how much visibility do you have right now out towards the March quarter?

And what are you expecting relative to normal seasonality for the first quarter of 2010?

So March quarter means calendar Q1?

Yes, that's right.

So next quarter's guidance will be provided next time.

But, in general, in Q3 we looked at the inventory situation.

It's very much under control.

Actually, many customers' inventory level is continuing to slide down a little bit, so inventory -- also, the channel sell-through has been quite good, so inventory should not be an issue.

So we were guiding Q4 -- Q4, the situation depends also on the year-end sales.

But even further range of forecasts, there are lots of uncertainties still, like year end holiday sales, and also other factors, like interest rate or consumer spending situation.

So we are not able to provide guidance for Q1 at this moment.

Okay, what would you -- the last couple of years have been abnormal.

What would you consider to be a normal Q1?

Q1, like in the past -- Q4 is actually seasonally will be a slow season for our business.

Q1 is similar.

But we were guiding the Q4, which is kind of flat relative to a strong Q3, so I guess this year is somewhat different.

That also makes the forecast more difficult.

I see.

Okay.

And then just in terms of on the communication side, what kind of trends have you seen in that market?

Are you seeing orders accelerate?

Are you seeing them slow down, or are they just flat-lining here at the same level that they've been at for the last couple of months?

It's quite stable and not bad, actually.

It's quite stable, communications, different wireless or wireless.

Got it.

Understood.

Okay, thanks so much.

Thank you.

At this time, there are no further questions in the queue.

I would now like to turn the conference back over to Mr.

Chitung Liu.

Thank you, operator.

And with no further questions we will conclude our call today, and thank you for joining us.

You are more than welcome to contact us directly if you have further questions.

Operator, back to you.

Thank you for 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.