聯華電子 (UMC) 2009 Q4 法說會逐字稿

Welcome everyone to UMC's 2009 Q4 earnings conference call.

All lines have been placed on mute to prevent 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 an hour after the conference is finished.

Please visit our website, 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.

Thank you and welcome to UMC's conference call for the fourth quarter of 2009.

With me today is the CEO of UMC, Dr.

Shih-Wei Sun.

During this conference we may take forward-looking statement based on management's current expectations and beliefs.

These forward-looking statements 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 this reason, please refer to UMC's filing with the SEC in the US and the ROC securities authorities.

Now let me begin with the financial numbers.

For the fourth quarter of 2009 revenue increased 1.2% quarter-over-quarter to TWD27.75 billion from TWD27.41 billion in quarter three '09, an increase approximately 50% year-over-year from TWD18.54 billion in Q4 2008.

Gross margin was 25.9%.

Operating margin was 13.5%.

Net income was TWD4.4 billion and earnings per ordinary shares were TWD0.35.

The capital expenditure invested during the quarter were TWD10.19 billion.

Cash balance here increased to TWD52.79 billion due to a rise in net income in the second half of the year, to TWD10.49 billion.

For the full year of 2009 revenue decreased 4.2% year-over-year to TWD88.62 billion from TWD92.53 billion in 2008.

Gross margin was 17.9%.

Operating margin was 3.8%.

Net income was TWD3.87 billion.

Since the full year of 2009 remained profitable with earnings per share of TWD0.31, the Company plans to propose the distribution of dividends to shareholders and employee bonus at the next Board Meeting.

Above is a short summary for the result in Q4 '09 and the whole year 2009.

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

I will now turn the call over to Dr.

Sun.

Thank you Chitung.

First of all, a Happy New Year.

Thank you for joining us today.

As always, I appreciate your interest in UMC.

I will start with a brief summary of UMC 2009 operating results and share with you our general operating outlook.

Then I will provide you with the guidance for the first quarter of 2010.

Following this, we will leave the rest of the time to answer your questions.

In 2009 UMC smoothly weathered the most severe economic recession in recent history.

Moreover, we were one of the first foundries to have recovered from the downturn and posted the lowest decline in revenue resulting from the financial crisis compared to the other foundries.

Looking to 2010, UMC shares the industry's positive outlook on growth for the foundry sector.

For 2010 UMC plans to increase CapEx to $1.2 billion to $1.5 billion to accommodate the robust demand we are seeing from customers for advanced technologies, to attain a reasonable balance between market share and return on equity and to solidify UMC's stable long-term growth.

Capital expenditure for 2010 will mainly be used to build capacity for advanced processes.

We plan to boost the 45 nanometer and 40 nanometer process capacity, and continue to introduce 28 nanometer R&D and pilot production equipment at Fab12A in Tainan, as well as greatly expand the 65 nanometer and the 55 nanometer process capacity at Fab12i in Singapore.

In addition, we plan to accelerate the readiness timeframe of our Fab12A's phase 3 cleanroom-related facilities and equipment installation to meet demand for advanced technology capacity, and provide for a more flexible expansion plan.

At the same time we will pay close attention to the pace of the continuing economic recovery and the successive adjustments of the US and China's monetary policies.

UMC will continue to diligently monitor economic conditions over the next several quarters and react prudently in accordance.

Following UMC's customer-driven foundry solutions' approach over the past year, we have engaged new customers while further enhancing our relationship with existing customers and strengthened our ability to provide the best wafer foundry solutions.

Percentage of revenue from advanced and specialty processes has also increased with each quarter.

In terms of [our] 40 nanometer, UMC's independently developed high performance 40 nanometer logic process has not only helped the customers to beat the tape-out to production duration of the 65 nanometer generation by one quarter, but has also achieved stable and predictable yields.

This success has demonstrated that close cooperation between UMC and its customers for the 40 nanometer process can accelerate time-to-volume, satisfy customer demands for advanced processes and achieve win-win results.

UMC will continue to expand its global presence and proceed with its overseas acquisitions.

When finalized, this diversification of our manufacturing locations will help customers mitigate geographical risk, increase economies of scale and create synergies for the Company's overall operational and financial performance.

Now let me provide you with the guidance for the first quarter of 2010.

We expect the wafer shipments to be flat.

Wafer ASP will decrease by less than 3% in US dollar terms.

Currency appreciation will drive down NT dollar revenue by approximately 1% to 2%.

Capacity utilization rate will be in the high 80% range.

In terms of our profitability, our gross margin will be in the mid-20% range, which is adversely affected by the NT dollar appreciation.

The computer segment is expected to outperform other segments.

The CapEx budget for 2010 is expected to be in the range of $1.2 billion to $1.5 billion.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thank you.

Thank you sir.

(Operator Instructions).

Steve Pelayo from HSBC.

Great.

Just a follow-up on fourth quarter gross margins; they were down about 200 basis points but your manufacturing depreciation was -- excuse me, was down about 5% quarter-on-quarter which should have added about 170 basis points to gross margin.

So that really means those other manufacturing costs as a percentage of revenue really held back the gross margin potential.

Could you help me quantify what was going on there?

I understand some things on the inventory, employee bonus.

Just help me understand what were the impacts and were there any other negative impacts, yields or materials costs or something else out there as well that were governing gross margins?

No pretty much you mentioned most of them, such as employee bonus as well as NT dollar appreciation against US dollars.

So every 1% appreciation of NT dollars will drive down our gross margin by roughly 0.6%.

And in quarter four NT dollars appreciate about 1.5%, so that's about half of the gross margin decline.

Okay.

And then -- sorry, go ahead, finish.

I'm sorry.

Yes, I've finished, yes.

Okay.

And then I had asked a question earlier today about the potential to see this Company do 30% gross margins and you had said that was a good goal.

And now that I've come back and worked through my model and applied your depreciation guidance down about 10% or so year-on-year, I see it actually as being very possible even in the next couple of quarters or so.

Am I missing something here or do you think there, or is that really a stretch goal?

We, however, cannot really give a full-year guidance.

So for the time being, what we can do is to give you a quarterly guidance.

And last quarter -- last year in '09 we did have a gross margin of 27.9% in the third quarter.

And with the outlook for the year, as mentioned by our CEO today in the afternoon conference, 30% or an ROE of 10% will definitely be our goal to work for.

Well, if I use that as a comparison, then you would get about 200 basis points or 300 basis points higher on the lower depreciation and you'd get about 200 basis points or 300 basis points higher than what you did on the variable part as well.

So that then does put you over 30% gross margin, so help me understand.

Am I thinking about that correctly?

Again, while ever the negative factor you mentioned for Q1 may still persist for the rest of the year, including NT dollar appreciation, as well as the higher employee bonus for the whole year of 2010.

Okay, so maybe whatever you save in depreciation could still be actually spent in other areas.

Excellent; thank you.

Mehdi Hosseini from FBR.

Thank you.

A couple of questions regarding capacity.

Can you help me understand what the mix of 40 nanometer capacity would be by the end of this year?

And number two, is this CapEx front-end loaded or is it equally distributed throughout the year?

And I have a follow-up.

So the capacity, the CapEx is, you are correct, pretty much front-end loaded.

So, what's the first question?

The mix of 40 nanometer?

The 45 nanometer and the 40 nanometer capacity in terms of the -- in percentage of overall UMC capacity is about 3% by the end of the year.

For this year.

So if that's the case and I imagine you want to continue to increase this, should we assume that the CapEx or capital intensity is going to continue into 2011?

And given the increasing equipment lead times, especially on the lithography -- immersion lithography, should we also assume that you're going to continue to place equipment orders throughout the second half to make sure that equipment delivery is going to be there, especially for next year?

So, our capital intensity mentioned in the afternoon, from three years to four years cumulative average point of view is still about, we think, 25%.

So you're asking us again half of this year, are we going to continue the capacity expansion into next year.

So, it's -- we're still working on that.

So again, that's a rolling effort for UMC, but we're not going to stop.

We will update you at the right time.

In terms of the lead time, I think we have procured sufficient immersion lithography tools at this moment.

I see.

And what is your view regarding competition from outside of Taiwan?

There has been a lot of noise in the headlines.

But how do you assess 40 nanometer competition outside of Taiwan, from your point of view?

Actually I only comment UMC.

I mentioned earlier for 40 nanometer we are working on high performance and low power.

High performance, we had a press release about two weeks ago.

So we are shipping thousands of wafers per quarter.

On a high performance process we sell 12 immersion layers with a very predictable yield.

And also we -- actually, I mentioned earlier, we actually pull in the tape-out production duration by one quarter compared with the 65 nanometer.

So, it's [well underway].

In terms of our competition, I don't have any comment.

Thank you.

Thank you.

(Operator Instructions).

Pranab Sarmah from Daiwa Securities.

Thank you for taking my question.

My first question is what type of dividend you are going to pay on 2009 earnings?

Any thought on that side?

Our EPS for 2009 is around TWD0.31 and we have some surplus from previous years in terms of return earnings.

All put together we will submit our proposal to our Board next month.

So I can only give you clear answers in March.

But we are likely to pay out as much cash as possible.

Would you go for ever 100% payout?

I cannot really comment on that until our Board give the approval.

Okay.

Got it.

Chitung, you also mentioned depreciation expenses for whole year 2010 will be down by 10% year-on-year.

So that is --

Yes, roughly 9% to 10%.

9% to 10%.

That is despite your increasing CapEx by [threefold]?

Yes.

And the rate of decline will start to accelerate starting from mid of this year.

Next quarter we won't see too much; maybe 1%; 1% also of decline.

Q1 1% q-on-q down.

Yes.

Okay, got it.

And could you give us, for modeling purposes, what should be the tax rate for 2010?

It shouldn't be too way out from this year, which is around -- last year, which is 13%.

I think it will be somewhere in line with the 10% minimum tax rate.

Good.

And another question is on your investment on the LED side, there are -- some of the press articles are going on.

Can you elaborate how much money you are going to invest in 2010 in this particular business?

And what type of revenue contribution you are expecting in 2010?

For the past few quarters we actually briefly touched upon our investment in the green energy field.

Basically, we set up an investment company with a paid-in capital of TWD1.5 billion and with two focus; one is LED related; the other one is solar energy related.

In both we are doing a small scale supply chain type of building; meaning upstream, midstream and downstream type of smaller investment.

And if you follow our announcements over the past few months you will notice that we pretty much fill up the whole supply chain in both LED and solar already.

And going forward in the near-term the number of new investments probably won't be too many and, therefore, we will start to see some minor impact from our new investment.

But current stage is still, as I mentioned, supply chain build up and we won't expect too much profit or revenue contribution in 2010.

And my last question is the 40 nanometer.

Can you give us some color when you expect 40 nanometer will account at least 5% of your revenue?

So, I can only comment on the first half of the year, probably they will still be on a low single-digit.

Depend on -- I mentioned earlier, we are engaging with over a dozen customers intensively on the IP verification product, qualification stage, etc., etc., so depend on the progress of those programs.

Technology-wise, it is pretty much there already.

Thank you.

Thank you.

Randy Abrams from Credit Suisse.

Yes.

Good evening.

I joined a little bit late but wanted to clarify in the buyback you announced today, I think another 300 million shares.

In the buyback from last year you had not finished it.

So I wanted to understand, was the buyback fully for employee bonus?

Or is there a factor that you want to buy in and retire shares?

So if you could walk through your buyback thinking and just with the large cash balance do you have plans to step it up even just for the purpose of buying back and retiring shares?

UMC has been very proactive in terms of share buyback, either retired or transferred to employees if there's an opportunity.

The last buyback we did at the end of 2008, beginning of 2009, was 100% completed and we approximately transferred half of the [shareholder] shares to employees at the end of 2009.

And this run, the new run, also is going to be 300 million shares although the share price has been higher, but given our ample cash on hand we still decide to buy back and with the intention to transfer to employees if there's an opportunity over the course of the next two to three years.

If not, we certainly can retire them, which will also be a good thing in terms of shareholders' equity.

And going forward we will continue to monitor opportunities to see if we can continue with this buyback practice.

Okay.

And for the pricing, where it's coming down a bit less than 3%, is that from a normal new year price reset or product mix?

And as we go into the next couple of quarters where 40 nanometer will still be relatively low, do you expect a still mild decline trend for blended pricing in the next couple of quarters as well?

No, actually the slight -- possibly the slight decline Q1 blended ASP is mainly from -- so you understand, today's currently under the supply constraint situation and we certainly prefer to run more advanced than, for example, 65 nanometer.

However, each customer has their preferred profile of technology nodes they would like UMC to support.

So at this moment our priority is to support customers the best we can.

So that caused the mix to shift towards -- there was a mix shift towards the larger geometry.

That's the main reason for the decline.

So in Q2 we expect the situation should be much better.

Okay.

And for your current gross margin profile is it -- in second quarter, is that a better lift for just gross margin where 65 nanometer support is better than 90 nanometer and 130 nanometer?

I don't have the Q2 number yet but 65 percentage should be -- continue to grow pretty fast.

But is the gross margin just the gross margin percent?

Like, is it a more profitable node now for 65 nanometer relative to 90 nanometer and 130 nanometer?

Like, will you get a positive gross margin impact if that mix shifts back towards leading edge?

Well, if it's apple to apple equipment, certainly the mature one with more depreciation taken the margin -- for the time being the mature node is slightly better than the advanced node.

However if you use more advanced equipment to produce less advanced node then the margin will not be as good as it should be.

So things are a little bit complicated.

Okay.

Actually a 12-inch 65 nanometer and the 90 nanometer, they share a pretty high proportion of common tools, so we definitely prefer to run more 65 nanometer in our capacity mix.

Okay, makes sense.

Okay and the last question I had was on the IDM mix.

At one time it was running more 35%, 40% of sales and now down to 20% and some of that's from just industry shift to fabless.

But is there potential as we go into the upturn or do you see any of your IDMs that are getting tighter in house and just seeing that part of the business start to rebound?

Or do you think there's any rebound still to come from that part of the market?

Or do you think it's just a long-term industry shift and we won't get that as much this cycle?

For the leading edge technology, IDMs have already been [foundry out] trading their advanced technologies out to foundries for quite a while.

So that portion, I don't think there is any big change, but we are also seeing IDM companies are starting to foundry out their legacy technologies, for example, 8 inch.

So I think for us this is just general trend; fabless is [picking up] more and more later.

Okay.

All right.

Thanks a lot, guys.

Thank you.

Thank you.

Steve Pelayo from HSBC.

Yes, just a quick one.

With your front end loading of capital spending this year it looks like, if I'm calculating this correct, you'll likely to be free cash flow negative in Q1 or Q2 or both.

Am I understanding that correctly?

Well, depreciation alone it will be close to TWD0.9 billion and for the profit with depreciation, we believe it's going to well cover our proposed TWD1.2 billion to TWD1.5 billion CapEx.

So it shouldn't be negative free cash flow.

If you are saying the front end loaded, I believe Dr.

Sun was referring to the older base CapEx.

In terms of cash payments, most of the case it will be a few months afterwards.

So we don't expect to see a negative free cash flow for 2010.

Okay.

So I'll smooth out my actual cash base CapEx and we'll keep your free cash flow.

The last question I had is on you guided today that your year ending 2010 capacity would grow about 12% versus year ending 2009.

And you said 300 millimeter would grow 25%.

When you play around with the math on that it actually seems that your 200 millimeter capacity is still going to grow I think 5% or 6% or so.

Is that correct?

And where are you expanding 8 inch?

I don't have exactly the numbers in front of me.

I can comment on the 8 inch.

8 inch we are also -- you can see, we are also investing mostly on the technology mix transitioning from older technologies pushing the technology mix to 0.13 and 0.11 micron technology.

So, I don't have -- probably we have to follow up with you on the exact numbers.

You are right.

There are certainly some increase in range capacity as well.

Each fab has room for that increase?

Or I guess since it's really just conversion -- wait, it's actually running more wafers, so that means more equipment in the fab, so which fab has room to grow?

It's a stretch-out effort.

We're just trying to stretch more capacity.

Okay.

All right.

Now I understand.

Thank you.

Wait, if I can sneak in one more?

Any more progress on the [Huzheng] potential?

And also talk about UMC Japan consolidation; how that changes anything in your strategy or financials, [for example].

For both, the goal is really to enlarge our operating scale to gain the benefit of economy of scale and by merging Huzheng we will expect to see some 8% to 10% addition in capacity plus about 5% coming from UMC Japan.

As for the schedule, UMC Japan is going to have a shareholders' meeting on February 18, and after that we will start the so-called de-listing process.

Hopefully everything can be merged back at the mid of 2010.

As for Huzheng, still after the Taiwan Government's revised regulations and they start to become a bit more vocal recently about the coming up relaxation about investment in China's semiconductor industry.

But we're still waiting for their revision.

Great.

Thank you.

Good luck.

Thanks.

(Operator Instructions) Mehdi Hosseini from FBR.

Thank you.

Can you please comment on or share with us your opinion about your customers' inventory and the inventories that are in the form of finished wafer or [die] bank?

Is there a concern?

Or how do you assess that?

So, I answer the latter one first.

We don't have any either wafer bank or die bank at UMC; pretty much zero, so.

And as far as the overall inventory situation, we believe Q3 last year the inventory from our customers based on our understanding had pretty much reached the bottom.

So starting in Q4 we are seeing some inching up of inventory level, probably in preparation for the Chinese New Year.

However, the level is still quite reasonable.

Sure.

As far as the channel inventory, Q4 even though the sales during Christmas time should be pretty good, so the channel inventory has been well under control.

And also today our factories are pretty much quite busy, very full.

So the demand has been very strong, so overall speaking we are looking to a very good 2010 from the foundry side.

So if the sell through during the lunar New Year holidays comes in line or even better and with lean inventories, do you see a scenario where your customers come back to you late February, early March, with expedited orders with increasing rolling forecast shipment in Q2?

(Inaudible), sorry.

Or do you see -- I was just going to finish that question or statement.

Or do you already see your rolling forecast for shipment in Q2 already dialing or discounting a pretty good sell through?

For the Chinese New Year sell through we have to wait.

It's two weeks away.

Sure.

But today our order and booking situation is just phenomenal, just very busy.

All the factories are pretty much all full.

Right.

Just one follow up, again if the sell through during the Chinese New Year is good, and given the fact that utilization rates are pretty high, would that give you any ability to help increase prices?

No, we are not discussing that at this moment with our customers.

Okay.

And again the pricing situation is a case-by-case, also pretty much on a long-term basis.

Sure.

Sure.

I'm just trying to better understand the supply and demand environment.

If it's going to take some time for capacity to be added and inventory refresh restock is going to happen in Q2 and utilization rates already about 90%, then if certain customers -- top customers that will want to expedite, how will they be able to do that?

It's a very difficult situation today.

We're trying very hard to work with customers on a case-by-case basis.

It's very difficult.

Got it.

Thank you.

Thank you.

Thank you.

Pranab Sarmah from Daiwa Securities.

Yes, thank you for taking my follow up.

My question is how many -- what type of overbooking or extra booking you are seeing now?

And how many customers you practically have to say like you have to wait for a few months to get delivery because our orders are booked?

In that case, how are you managing to keep those customers in your hand, whether they are going to some other foundries out of [view]?

The answer is similar to the previous question.

It's, I think, a very difficult situation and I believe with this situation is across the board in the foundry sector today.

So we have to work with each customer on a case-by-case basis.

Understand they are -- for example, if they are single source with us how we can work together, sharing the limited resources together to go through this difficult situation.

It's fair to say you have more than 20% of overbooking than what is your capacity is telling you now?

I don't have the number, but it's very difficult.

It's a big gap on certain technology nodes, especially the leading edge.

And which of the technology nodes do you have a little bit of weakness?

Because your utilization rate is still mid-80s, that's where you are guiding, and probably Q2 might reach 90s, so where you have some unused capacity?

Certain legacy 8 inch, but they are also getting very busy these days.

Okay.

So that means as and when we move to Q2 we might see 100% inflation rate across the board?

No, no; we guided high 80s.

That is for Q1.

Q1.

Q2, I don't have the number as of today.

Okay.

And how will -- I see the Q1, it will be -- monthly momentum will be towards the back end loaded?

Or it will be quite flat toward monthly sales for Q1?

Well, February's short working days and also Chinese New Year.

Certain 8 inch wafer fabs still have short annual maintenance schedule, so it will be a dip in February.

And March, it could be better than January; that's the normal trend, right?

It should be, yes.

Okay.

Got it.

Thank you.

Thank you.

Thank you.

There are no further questions at this time.

Please continue.

Okay.

So there's no other questions, we would like to conclude our call today and thank you again for your interest in UMC.

Please feel free to contact us directly if you have additional questions.

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.