聯華電子 (UMC) 2010 Q1 法說會逐字稿

Welcome, everyone, to UMC's 2010 Q1 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After this 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 is now being broadcast 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 turn the call over to Mr.

Chitung Liu, CFO of UMC.

Mr.

Liu, you may begin.

Thank you and welcome to UMC's conference call for the first quarter of 2010.

With me today is our CEO, Dr.

Shih-Wei Sun.

During this conference call we may make forward-looking statements 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 these risks please refer to UMC's filing with the SEC in the US and the ROC Security Authority.

For the first quarter of 2010, wafer shipment volume achieved a record high of 1.033m 8-inch equivalent wafers and capacity utilization rate rose to 88%.

Revenue decreased 3.7% quarter-over-quarter to TWD26.72b from TWD27.75b in Q4 2009 and increased 147% year-over-year from TWD10.84b in first quarter 2009.

Gross profit margin was 24.6%.

Operating margin was 12.7%.

And net income was TWD3.48b and earnings per ordinary share were TWD0.28.

And earnings per ADS was $0.044.

Above is the quick and short summary for the results in Q1 2010.

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.

Thank you all for joining us today.

As always we appreciate your interest in UMC.

I will start with a brief summary of UMC's 2010 first quarter operating results and share with you our general operating outlook.

After that I will provide you with the guidance for the second quarter of 2010.

We will then have a Q&A session to answer your questions.

For Q1, we continued to experience robust demand with average selling price falling slightly compared to the previous quarter, only because we focused more on supporting our customers' short term product mix to strengthen our long term partnership.

At the same time UMC continued to work with customers to migrate products and technologies in alignment with the high end process capacity that is slated to become more readily available from the second quarter onwards.

As UMC continues to optimize sales, capacity mix and the business composition, we anticipate revenues and profits to continue on an upward trajectory, with the share of revenue contributed by 65-nanometer and below technologies to grow significantly.

UMC optimistically anticipates continued growth momentum.

Meanwhile, we will closely monitor the strength of that momentum within the overall economic context, especially in the second half of the year to ensure that we respond prudently.

With regard to technology, UMC's internally developed high performance 40-nanometer logic process has demonstrated steadily higher yields for customers' products and our 45-nanometer low power process has also smoothly ramped up to mass production.

Many of our high performance and low power 40-nanometer customers have achieved product verification with us and we will continue to support more customers' design tape-outs.

Our development of 28-nanometer gate-last high-k metal-gate technology has been progressing well, with plans to achieve IP pilot capabilities by the end of 2010.

Since early this year, we also began to work with customers on planning and the initial development of advanced 20-nanometer technology.

As technologies advance, UMC will continue to invest CapEx in augmenting high end and specialty technology capabilities each quarter to serve our customers.

Our 65/55 nanometer capacity at Fab 12i in Singapore will increase substantially beginning in second quarter.

At Fab 12A in the Tainan Science Park we plan to pull in the timeframe of our Phase 3 readiness so that cleanroom related facilities and equipment installation will be completed by Q3 with production lines running in Q4.

We have fully devoted our efforts to satisfying our customers' needs and creating win-win scenarios while pursuing long term return on equity growth.

We will be celebrating our 30th anniversary soon and UMC has always committed itself to investing in Taiwan as its base in establishing a global presence.

In preparation for future expansion, we began the Tainan Science Park project to not only invest aggressively in broadening our capacity offerings, but also to establish a new training center devoted to attracting and training the industry's top talents, further demonstrating our Company's commitment to sustainable growth.

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

We expect wafer shipments to grow in the high single digit percentage range.

Wafer ASP will increase but approximately offset by currency appreciation.

Capacity utilization rate will be in the high 90s range.

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

The growth momentum will be from all three segments led by strong consumer sector.

Revenue contribution from 65-nanometer and below will be in mid 20s range.

The CapEx budget for 2010 remains unchanged and is expected to be in the range of $1.2b to $1.5b.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thank you.

(Operator Instructions).

Your first question comes from the line of Randy Abrams.

Yes, hi, good evening.

I want to ask a question on the gross margin.

It's moving to high 20s next quarter or second quarter at high 90s utilization.

What do you see the gross margin profile as we go toward -- I think in the afternoon you said 35% to 40% could be 65-nanometer and below.

If we assume we're still near full capacity, would gross margins expand further?

And if you could talk in that context how you see depreciation trending sequentially over the next few quarters?

For depreciation expenses on a quarterly basis, it will be sequentially down a few percentage points per quarter.

But as a whole year, we expect to see about 8% to 9% depreciation decline versus 2009.

However 2011, we're going to see a rebound in the depreciation expenses, given our high CapEx this year and we also expect to see a pretty big number next year.

So to answer your question, we really cannot give an earnings guidance for a quarter beyond second quarter.

But certainly we briefly touched upon our view on blended ASP in this afternoon's conference call.

We do see -- expect to see further upside from our -- for our blended ASP given our continuous enriching sales mix.

Okay.

And you hinted I guess that next year we could have a pretty high CapEx number.

Could you talk about the motivation?

Is it more to put in 45-nanometer where we have to go through the big investment on that?

And maybe just on CapEx to revenue, I think long term it's 25%.

But how should we -- I guess if we start to plan it and look ahead to next year, an early look, that big CapEx number what you're looking at as you go into 40-nanometer?

So Randy you are asking next year's CapEx number?

Yes, well, just the framework for CapEx, how you're thinking about it.

Like will it stay at similar capital intensity to what we're seeing this year or could it even be higher as you do the main 45-nanometer ramp?

I think it's too early to forecast next year's CapEx number.

But you know CapEx is a rolling kind of an average.

So by the right time we will share with you the exact numbers.

But this year we are pretty much on track on the $1.2b to $1.5b of CapEx.

Okay.

And on the IDM outsourcing, it's been about 20% of sales.

But it used to be up in the range of 30% to 35%.

I guess first, I'm wondering these next couple of quarters, do you see a cyclical rebound in some of the IDMs as they get [full].

And I think you mentioned a bit that you have some programs you're working with.

Do you see any meaningful new contribution or new customers coming in from the IDM that change your mix in a meaningful way, where IDMs start growing as a percent of your sales?

As I mentioned in the afternoon, it's -- we are changing the -- we are improving our business mix, product mix.

The IDM is a very important component.

They are new content inside this part of the pie.

So it's possible.

We are definitely engaging with some more, at a very good momentum from different IDMs and different business and new business, different new segments.

So it's possible.

But in the meantime, the fabless is also very strong.

So I don't have the exact numbers about the mix change going -- moving forward.

Okay, thanks a lot.

Thank you.

Your next question comes from the line of JJ Park.

Hi, good evening.

My first question, looking at the Q1, the number, ASP decline seems to be higher than your previous expectations.

Is it the increasing proportion of the consumer application?

And then related to the ASP you mentioned the second quarter ASP increase.

Can you give us some color on the magnitude of the ASP increase?

For the second part, the ASP increase is going to be -- according to our guidance offset the TWD appreciation and our assumption for TWD appreciation in the second quarter is roughly 2%.

So that's also the ballpark figures we have in terms of blended ASP increase.

And as for your first part of the question, did you mention that because the consumer content of our revenue actually put the weight on our ASP?

Yes, that's correct.

Well, we actually mentioned that's because we tried to meet our customers' short term demand without trying the maximums in terms of pushing to the limit or in terms of technology allocation versus customers' demand.

So it's not so much related to the consumer revenue base.

Actually, JJ, if you look at our pie chart on the technology break up, we run more 0.13 microns in Q1 than Q4, by 2% more I guess.

So that's why in example we are supporting customers' short term demand.

So we just have to assume that there is no ASP decline on an apple to apple comparison then.

There is no special ASP decline, nothing special.

Okay.

And my second question, if you look at the first half momentum, it seems to be much better than normal seasonality.

Are you thinking that this trend will continue given a less seasonal pattern in terms of when the demand will increase in proportion from the China and Asia, other country?

Or 2010 is a kind of special year, we see the better first half, compared to the normal seasonality?

Yes, yes.

So this year's first half is stronger than the past.

But last year was not really normal either.

But you mentioned the China and the emerging markets.

They are still very strong.

It's quite sustainable.

In the meantime, the other regions US, Europe or even Japan, they are picking up the momentum as the second wave of recovery starts.

So I mentioned also in the afternoon we checked the semiconductor or IC company inventory results.

They are inching up from Q3 last year.

However, overall speaking, even to Q1 today, they are still within a reasonable range.

However, in terms of the electronic system companies channel inventory situation, it's definitely worth to keep a close eye on them, as we move into the third quarter.

Okay.

Related to the inventory issues, how fast can you figure out the inventory issues, if there's any double ordering or inventory build up?

Can you see some visibility when they're going to reduce or cancel the order?

Actually, as I mentioned earlier, the double booking or inventory with our direct customers is not that serious or it's very well managed.

Everybody is worried about the inventory so it's well managed.

However it's the semiconductor company, which is the system company, that part of the potential over-shipping or double ordering, that part has to be watched out more carefully.

Okay, thank you very much.

Thank you, JJ.

Your next question comes from the line of Donald Lu from Goldman Sachs.

Hi, good evening.

I have a couple of questions.

First is I see your utilization is going to high 90s in second quarter.

Congratulations on that.

I think this is the first time since 3Q '07 that utilization goes above 90%.

And usually I think the industry can raise price somewhat when that happens.

I don't know whether this time that will still be the case for UMC.

Again, pricing is negotiated on a long term basis.

We are definitely not trying to be opportunistic at all.

As I mentioned -- even in the first quarter I mentioned that in the beginning.

We are even trying to support customers' near term product mix requirements versus our preference of running more leading edge.

So pricing is really -- it's a long term partnership kind of a thing.

So we are improving our ASP, blended ASP mostly by product mix improvement.

I see.

And my second question is on the CapEx spending pattern.

Will that be front-end loaded this year or is that going to be spread throughout the year?

Our budget is still $1.2b to $1.5b.

And as you can see from our financial report, in Q1 we spent about TWD10b or $300m.

So I would say it's going to be quite linear, spread out through four quarters.

Okay.

And you mentioned that your 40-nanometer yield is higher than something.

Can you elaborate on that?

And one of your competitors has had a problem at 40-nanometer for several quarters.

Can you tell us why that your 40-nanometer yield seems to be ramping up faster?

Our 40-nanometer yield has been improving steadily.

And based on our customers' feedback we are ramping both 40-nanometer high performance and 45-nanometer low power technologies simultaneously in our Fab 12A in Tainan.

Based on customers' comments this node, from R&D to manufacturing including the transfer everything, the ramp has been quite smooth.

Some even commented it even is smoother than 65-nanometer.

So, so far, so good.

So we will continue our efforts to lower the defect density.

I see.

How about the design-in activities for 40-nanometer relative to 65?

Is that as strong or it's not as strong?

It's quite strong.

Last earnings release I mentioned we have over ten engagements doing lots of verification on the product level.

We are offering [shadows] and we are also starting to fan out to the second wave of customers.

They are very exciting.

Okay, great.

My last question is on UMC's effort in LED and solar.

There has been several reports that UMC has been investing in China.

Can you give us some color there and also what kind of earnings or outlook we should expect?

Hi, Donald.

We actually set up a new business investment company, 100% owned by UMC.

And we actually report all their major investments and we want it to be as transparent as possible.

For the time being there are two major area, one is as you mentioned LED and the other one is solar.

And we are building each key player in every section of the whole supply chain.

And we're pretty much near completion of both solar and LED for the two supply chain in Shandong Province in China.

And we have strong support from local governments and we also have good chance to win a lot of government contracts.

And in return we also sometimes put in some small investment.

And if this model plays out well we are likely to replicate this, like a business development type of project in many other cities in China.

And how much is the CapEx -- sorry.

So as for the earnings contribution, most of the player we -- are just being set up on greenfield.

And we don't really expect to see profit contribution, at least not on a large scale in 2010.

How much CapEx was spent on this solar and LED?

Is that part of your overall CapEx?

No, it's not part of our overall CapEx.

For the time being, as I mentioned, it's a 100% owned investment arm called New Business Investment Company and for the time being we put in TWD3b as the paid in capital.

And this part however did not include -- does not include NexPower, our thin film solar cell investment.

So that so far has been separated from the new investment company.

So the solar and LED investment in China right now is capped around TWD3b.

Okay, great.

Thank you.

Thank you, Donald.

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

Good afternoon.

I have a couple of questions.

First, maybe I'll start a bit with 40-nanometer.

What is the revenue contribution you got in 40-nanometer in Q1?

Q1 is over 1%.

It's 1%.

So it was down from 3% on the Q4 last year.

No, no, no.

It's always up.

3% is the next -- this Q2.

Q2 3%, okay.

Yes.

3%.

3%, got it.

And the second one is on the 28-nanometer, are you going to provide low power high performance technology node?

Yes, it's the same.

We have low power high performance.

Also we have a Poly/SiON version also, gate-last high-k, metal-gate version.

And also there is a new convergence of our technology, both high performance, low power on the same process.

So we are offering all of them on a customer driven basis.

Driven.

And are you also doing research on low resistance material?

It's a given.

Actually today as the (inaudible) gets shrunk, low resistance barrier material is being researched extensively throughout the industry.

It's nothing new.

Okay, got it.

Could you also comment a bit on the raw material price increase, whether -- have you seen any increase on the wafer pricing and chemical pricing and how you are handling that cost now?

It's a big challenge.

Actually the wafer price, as you know in the industry has been on an upward trend for foundry and memory.

So it's a challenge.

So we need to work harder on cost reduction from other areas.

And is it going to impact on your margins at some point because of the -- can you give some number, like what type of increase on the wafer pricing you are expecting on the second half this year?

We experienced some wafer price increase but definitely below the average increase of the industry.

That's how we are very sure.

And secondly, if you look at our inventory numbers we actually beef up our stocking of the raw wafer and some other materials just because of the price increase.

So there shouldn't be any material impact on our profit margin in the near future.

Got it.

Then for the second quarter, how should we look at the OpEx and tax rate?

Tax rate, it should be between 5% to 10%, stay close to the minimum tax rate of 10%.

And as for the OpEx, our CEO mentioned his target is to keep the ratio constant.

So the OpEx to revenue ratio should stay static.

Okay, got it.

Could you also comment a bit on the visibility, what type of visibility you have beyond second quarter?

And is there any changes you have seen over recent days compared to three months back on the visibility front?

Not really.

I think the demand continues to be quite strong.

The booking situation is also strong.

And also customers are building up some inventory for the second half of the year, the stronger season.

So in the meantime we need to watch out after Q3, in Q4, Q1, are we going to experience the traditional cycle of the business and how far.

Those are the questions everybody are watching out carefully now.

Okay.

And my last question is on 28-nanometer, how many customers you have (inaudible) so far?

We have quite a few.

I think six customers.

About half a dozen.

Half a dozen.

Around half a dozen, yes.

So it's remained unchanged that number.

Yes.

Okay, got it.

Thank you.

Thank you.

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

(inaudible - microphone inaccessible).

We cannot hear you very clearly.

Hi, Steven.

You have to get closer to the microphone and speak up a little bit.

(inaudible - microphone inaccessible).

Operator, we have difficulty.

So we may have to skip this one and go to the next one first.

Okay.

The next question comes from --

(inaudible - microphone inaccessible).

The next question comes from the line of Jagadish Iyer from Arete Research.

Hi, thanks for taking my questions.

Two questions.

What is your estimate for 65-nanometer contribution to your revenues by the end of '10 please?

By the end of '10, the 65-nanometer and below technology should be above 35% of our revenue.

That's our target.

And in terms of capacity expansion, how should we think about year-over-year change in your 300-millimeter capacity addition?

And how do you see that proportionately for 200-millimeter for 2010?

The year-end to year-end 12-inch capacity increase for UMC is about 25% and overall for UMC year-end to year-end about 12%.

And the last question I wanted to ask you was what is your biggest change in terms of your 40, 45-nanometer, whether it's all the three product portfolios versus 65-nanometer in terms of material changes that you see, whether it's deployment of immersion?

Can you just elaborate on that please?

Thank you.

Our 40, 45-nanometer is the standard.

It's the standard industry approach.

For high performance part, certainly all the 40, 45-nanometer needs to use immersion lithography.

And the 40-nanometer high performance uses some other enhancement on performance, for example, embedded silicon germanium for each end of strain engineering.

And the older technology use ultra low-k for the back end.

And also for high performance part we also have to use the laser anneal for ultra shallow junctions.

So there are lots of additions, technology to enhance the technology performance for this node.

But they are no different from the other players in the industry.

Thank you.

Thank you.

Your next question comes from the line of Mehdi Hosseini from FBR.

Yes, thanks for taking my question.

As a follow up to one of the earlier questions, I want to find out what are your thoughts, what's your opinion about your customers' inventories.

And does that make you concerned especially as they're building up inventory for the second half?

And then as a follow-up, as you plan for next year CapEx, is it the inventory in the second half that is going to be a key decision -- a key factor in your decision what to do with the CapEx next year?

Or is that more of a macro -- or maybe you can share with us the key factors that are going to influence your CapEx plans for next year especially as your utilization rate goes into the high 90s?

Thank you.

Your first question was inventory situation of our customers.

We are watching it out very carefully so we are working with customers, understanding their situation.

Most of our customers, as of today, many of their products are single sourced with us or with other foundries.

So they are watching that very carefully.

The IC or semiconductor companies' inventory level is still where we've seen the historical level, although they are higher than in Q4 and higher than Q3, but where we've seen the reasonable range.

Again for the -- but in the system level whether they will be a channel clash later in the channel we need to be very careful for the second half especially towards Q4.

As far as our long term CapEx, we mentioned in the long range, multiyear average we try to keep it down to 25% of our revenue.

So it's a rolling kind of thing.

However, we are opening up a new big factory in Tainan, the Fab 12A Phase 3 and Phase 4.

So since we -- the timing is very excellent actually.

So if we can grab this upward cycle and quickly ramp the fab, the new fab into some economy of scale, that's a very reasonable plan.

However, it is still early to share with you our CapEx plan next year.

Just two quick follow-ups.

On the CapEx or new fab, is that going to be like your previous fab, where the initial capacity is like 40K, 50K per month?

And as a follow up to the inventory, I look at your capacity and Taiwan's semi capacity, doesn't the capacity or incremental capacity increase from Q2 to Q3 somewhat limits the excess inventory buildup because on aggregate the foundry capacity is only going to increase single digit from Q2 to Q3.

Why wouldn't that be a limiting factor to help avoid excess inventory?

The first question was the fab size, right, 40K or 50K for the --

Yes.

It is correct.

I think we are building mega or giga fabs to reach better economies of scale.

So those are huge fabs.

There's no difference.

As far as the incremental capacity increase, it's -- for this 40-nanometer or new technology it's quite challenging.

Buying equipment is just the starting point.

We need to get everything worked out.

So maybe some lead time.

Overall speaking we are pretty much on track in terms of our plan of capacity release.

Sure.

So wouldn't that limit any excess inventory buildup at your customers' site, just the fact that the transition to advanced nodes are challenging enough to limit their incremental capacity increase to only single digits, in terms of growth, Q3 over Q2?

Our direct IC customers, I don't think they are really intentionally building any excess inventory.

I think they are all very careful.

But overall aggregate of the industry there may be some pockets of channel inventory.

But we need to watch it out carefully.

Okay, got it.

Thanks so much.

Thank you.

(Operator Instructions).

You do have a question from the line of Emily Liu from Arete Research.

Hi, this is Emily.

Thank you for taking my question.

I have a very quick housekeeping question.

I think in the guidance you mentioned the wafer price ASP appreciation will be offset by currency change.

Can you give more color on whether it is high single digit or low double digit change on both factors?

Our assumption for TWD exchange rate in quarter two is TWD31.3.

That suggests about 2% appreciation of TWD against US dollars.

So that's also the ballpark figures for the blended ASP increase in our second quarter forecast.

All right, okay.

Thanks.

Thank you.

And there are no further questions at this time.

Mr.

Liu, back to you.

Okay.

Thank you, everybody, for joining UMC's call today.

And that concludes our conference call.

And we are looking forward to our earnings release next quarter.

See you.

Bye-bye

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