聯華電子 (UMC) 2010 Q2 法說會逐字稿

Welcome, everyone, to UMC's 2010 quarter two 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 being broadcast live over the internet.

Webcast replay will be available within an hour after the conference has 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 your conference.

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

With me today is the CEO of UMC, Dr.

Shih-Wei Sun.

During this conference call, we may make forward-looking statements based on management's current expectation 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 beyond company's control.

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

For the second quarter of 2010, capacity utilization rate was full, with shipment growing to a record 1.156m 8-inch equivalent wafers.

Revenue increased 11.3% quarter over quarter to TWD29.75b from TWD26.72b in Q1 2010 and increased 31.5% year over year from TWD22.63b in quarter two '09.

Gross margin was 29.6%.

Operating margin was 18.3%.

Net income was TWD5.27b and earnings per ordinary share were TWD0.42.

Earnings per ADS were $0.065.

Above is a short summary for the result in quarter two 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.

Thanks, Chitung.

Good morning, good afternoon and good evening.

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 second quarter operating results, and share with you our general operating outlook.

After that, I will provide you with a guidance for the third quarter of 2010.

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

Okay, let's now get it started.

For Q2, revenue exceeded our expectations, due to UMC's accelerated ramp-up of advanced process capacity and optimization of product mix.

Revenue contribution from 65-nanometer and below products grew more than 50% compared to the previous quarter, with 40-nanometer output reaching 3% of revenue.

As such UMC achieved a five-year high in operating income and an annualized return on stockholders' equity, ROE, of more than 10% this quarter.

Demand is expected to remain robust to advanced processes, driven by new applications and technology migration.

Therefore, we are optimistic about third quarter growth, anticipate rising revenues and profit and maintain a healthy outlook for mid to long-term demand.

UMC's successful efforts to customize advanced technology development and optimize product mix have led to an expanded customer base, increased sales and a greater profit capability.

To continue boosting competitiveness and pursuing steady growth, UMC plans its capital expenditures based on careful assessments of mid- to long-term demand and the capacity expansion risks according to our customer-driven perspective, so as to capture the robust growth momentum in addressable foundry markets.

UMC plans to raise this year's capital expenditures to $1.8b to satisfy customer demand for advanced technology and capacity.

This CapEx that the company has invested is being used to expand advanced capacity.

Currently advanced process equipment procurement and installation are proceeding smoothly.

Singapore's Fab12i has been accelerating its 65 and 55-nanometer capacity expansion to better serve our foundry customers this year.

Fab12A's Phase 3 cleanroom, already completed in July ahead of schedule and beginning equipment installation is expected to start production by year's end and increase 40-nanometer production output at an accelerated pace next year.

This expansion will gradually build up economy of scale and usher in a new wave of growth, producing a win-win situation with customers and boosting shareholders' return on equity.

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

We expect wafer shipments to grow in the low to mid-single digit percentage range.

Wafer ASP will increase approaching mid-single digit percentage.

Capacity utilization will remain full with gross margin in the low 30% range.

Growth momentum will come from all three segments led by the consumer sector.

Revenue contribution from 65-nanometer and below will reach approximately 30%.

The CapEx budget for 2010 increases to $1.8b.

That concludes my comments we are now ready for questions.

Operator, please open the lines up.

Thanks.

(Operator Instructions).

Your first question comes from the line of Randy Abrams of Credit Suisse.

Yes, hi, good evening.

I want to see if you could elaborate on the order trends you are seeing, if you're seeing any change in urgency of orders from customers, and if any end markets are looking particularly weaker going into second half?

Well, since we have been fully loaded for quite an extended period of time, in other words, it's been on allocation.

So we have been working with customers very carefully on their long-term and mid-term and near-term demand situation.

So as I mentioned in the afternoon conference call there are clearly some landscape shifts company by company or segment by segment.

But we are dealing with them in a win-win kind of situation with customers.

So for Q3 we are completely loaded.

So looking into the pattern we also guided in the afternoon, second half is similar to the past years.

Second half is stronger than the first half.

And for all segments, also the three consumer computer or communications segments, we are intentionally trying to optimize our mix.

So there our results may not necessarily reflect directly to the industry situation.

Okay.

In the 65-nanometers getting a strong ramp these past few quarters, could you give your view on this node?

I think a year or so back you said customers were skipping nodes and some of them skipping 90.

But is it your perspective 65 is a big node that customers stay on, whereas now you are expanding out 40.

Do you expect to see a similar strength at 40-nanometer?

How do you see the nodes playing out?

I think 65-nanometer is a strong node.

And as more slow in general somewhat slows down, 65 is a strong one.

You also mention the 90 being skipped by the latecomers, so even today the latecomers are directly -- some jump into 55-nanometer node.

40 is a more expensive node, depending on the application.

Some leading customers they have to migrate aggressively to 40 but not everybody.

So we are also watching it carefully trying to strike a good balance among the two nodes.

And last question I have, if you could give your view on the capital intensity as you're doing investments on 65 and 40-nanometer, how capital intensive to add additional capacity is now versus some of the prior.

If there is a percentage increase to add capacity now that you're seeing relative to some of the older nodes like 90 and 130.

So the leading edge is indeed very capital intensive, also the capacity release take more extended periods of time for -- to release and the qualification.

For the 40-nanometer, because of the emergence some laser, some silicon trimming there, it's quite more expensive than the previous node, maybe, I don't have the exact number, at least 20% more than the 65-nanometer I think.

Okay.

Thanks a lot, guys, good evening.

Thank you.

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

Thank you for taking my questions.

Good quarter, a couple of questions I have.

Pranab, sorry, you have to speak up a little bit.

Can you hear me now?

Yes.

Congratulations on a good quarter, a couple of things from my side.

Could you give some color on your development on 40-nanometer and 28-nanometer how it will pan out say 40 nanometer by fourth quarter this year and 28-nanometer next year.

What are your expectations currently?

So 40-nanometer is in production.

It is (multiple speakers.

Yes, 3% of revenue on second quarter, so how is --

Yes, 3% revenue on second quarter, so now it's continuous ongoing yearly improvement and optimization.

So that will be ongoing as we ramp up.

For 28-nanometer we have two process options, one is a high-k metal gate.

We see the high-k metal gate we have quite a few different versions, the high-performance also the SoC based, the more low power base.

Also -- we also have the poly/SiON based 28-nanometer.

So for 28 high-k metal gate we are able to do the pilot production, or risk production towards the end of this year.

So it's moving along pretty well.

Okay.

And how many customers are already signed up for your 28-nanometer process?

It's not kind of a -- it's a further technology development it's a continuous spectrum of efforts from 40-nanometer order.

Most of the 40-nanometers are working with us on 28.

But again we mentioned in previous few quarters still we have six firmly engaged customers on 28-nanometer.

Got it.

And could you give color on your OpEx in third quarter and fourth quarter, how it looks like this year?

The trend is some of the expenses will still grow along with the enlarged revenue base.

But as a percentage of revenue it should continue to trend down slightly.

So we expect to see a smaller percentage of revenue as operating expenses in quarter three.

But the absolute number may still grow a little bit.

Okay.

And what are you looking at the color on fourth quarter this time, like talking to your customers and all are you getting any sense of slowing down in fourth quarter or you are still expecting -- fourth quarter still looks okay to you?

We will provide fourth quarter details next quarter.

But we did say in the afternoon, second half should be stronger than first half.

Yes, second half is stronger than the first half, similar to the patterns in the past few years.

Maybe you can help us in getting the linearity of that third quarter, how it will look like on a third quarter monthly basis, the run rate.

It's kind of flat.

Flattish, okay, got it.

Thank you.

Thank you.

Your next question comes from the line of Emily Liu of Arete Research.

Hi, congratulations on a good quarter and thanks for taking my question.

I have two questions.

First of all, how do you see your wafer COGS to trend in the second half of the quarter given the tightness that you have in [millimeter] wafers?

And the second question is can you give us more color on the incremental CapEx spend, the breakdown if possible?

For the wafer starting raw material I don't have the exact numbers.

I understand in the past few months or past quarter or two, some specialty wafers, some specialty wafer prices did increase across the industry.

Right.

It's very clear.

But again the raw material is not a huge percentage of our overall total COGs, so we are trying to manage it well.

Okay.

The second question is the incremental capital expenditure.

Right.

Mostly, 40-nanometer and some of 55, 65, certainly we are adding some 28-nanometer R&D to it as well.

Okay.

But 40 is the majority of the incremental investment.

Majority does that mean 80% of the incremental spending?

I don't have the exact breakdown.

Right, okay.

(multiple speakers) kind of a --.

Okay, thanks.

Thank you.

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

Good, thank you.

Congratulations, great quarter and outlook, nice to see you guys back to the 30% gross margins.

First, I want to clarify, you made a comment about you're kind of optimizing your mix so it may not reflect what the market is doing.

And your mix is actually very strong in consumer in Q2 and you're guiding to it to be relatively stronger in Q3 as well.

Is consumer a more optimal mix for UMC?

Is it a higher margin business for you?

It just kind of surprised me that comment.

Consumer includes lots of -- so for our definition of consumer that includes lots of different applications.

I don't know exactly the applications, but it's a rich mix of different things.

For us, as we mentioned in the afternoon, we are optimizing the mix and capacity and also the broadened customer base.

So we are working with our long-term partners to fine tune our addressable market to optimize our mix, diversify the risk, and in the end trying to reach our profitability as well.

It doesn't meant that the consumer it has a higher margin.

There is so many different customers, different things.

Okay, fair enough.

Thanks for clarifying that.

Now on your capacity plans you obviously gave some guidance for where the third quarter would be ending.

But I'm kind of curious if you look out a little further, let's just say even a year from today, where do you think that 12A and 12i capacities will be running?

So -- well, okay.

So 12 -- a year from now is too far.

Okay.

We think our visibility we are adding this -- we updated our [1.8b capacity].

So for 12A we are increasing the -- quickly ramping up the Phase III capacity.

So we are trying to -- for a new fab, adding additional 15k is very reasonable so that's the first step, we are adding an additional 15k 12-inch in Phase III, so we reach a better economy of scale.

And 12i as I mentioned earlier, 12i is the main focus for our capacity ramp this year.

So that capacity at this moment I think is pretty much getting full now.

I don't know exact the number, I think maybe around 45k per month 12-inch now.

Okay.

And when do you think the additional 15k and Phase III will be on board and active capacity?

Oh, it takes some time.

We are -- I mentioned earlier we are, the cleanroom has just been completed in July, we are actively and aggressively putting in equipment so that will continue to next year this year, next year.

But the earliest production revenue will be realized maybe towards the end of this year from Phase III of 12A.

Okay, fair enough.

And then with this higher CapEx I think you guys made some comments about your depreciation for next year in the afternoon.

If you could repeat those, and then also maybe talk a little bit more in the near term the depreciation in your cost of goods sold in Q3 and Q4, how is that going to start to rise as we then go into 2011 and its goes higher?

Depreciation expense in 2010 still expects to be about 8% to 10% lower than the previous year.

And we expect to see a small trend down in quarter 3 and Q4.

And Q4 is likely to be the trough of the recent depreciation curve.

Starting from 2011 because of the high CapEx in 2010, we expect the whole year 2011 to have higher depreciation expenses compared to that of 2010.

And we don't have the final CapEx for 2011 yet.

But overall we don't expect the increase to be more than 10%.

Okay.

And my last question, I'll get back in the queue, but your non-operating income line usually has a nice benefit in the third quarter each year from your investment portfolio and dividend income.

Can you give us some guidance on what you think that might be in the third quarter?

Yes, we mentioned in the afternoon session that it should be more than TW1b in third quarter.

Thanks.

Sorry for making you repeat it all.

Thank you.

Thank you.

Your next question comes from the line of Aaron Husock of Lanexa Global.

Great, thanks for taking my question.

Maybe just first could you comment at all on your view of inventory levels at your customer base?

So the inventory level through last year's economic crisis, Q3 last year was at the bottom.

It has been inching up, however it's, we think, a very reasonable level.

Also we observed recently the -- this year 2010's foundry revenue growth and also versus semiconductor company or chip companies' revenue growth, actually the gap is, I think it's narrowing, which is indicating a very healthy management of the inventories throughout the supply chain.

So the continuity is getting better, so I think the inventory is definitely fine through our -- in general, in general from a macro kind of consideration, certainly case by case there are variations.

So also we are monitoring the revenue to inventory ratio for different -- of our customers they look fine also.

So I think the revenue should be fine.

Everybody is very careful but the demand side may fluctuate, or may have a seasonality from segment to segment and company to company.

Okay, great.

And when you talk about your gross margin for Q3, low 30s is kind of a wide range; can you kind of be a little bit more specific?

And maybe talk about what factors could make it look more like 30% to 31%?

And what factors could maybe make it look more like 33%?

Kind of what are the variables?

Because our guidance does not incorporate the impact from currency changes, so we actually think low 30s is a rather tight range given the volatility in NT dollars exchange rate against US dollars.

So the parameter we cannot control is the currency.

And yes, we still believe low 30s is the most likely range for our gross profit in the third quarter.

Okay, great thank you.

Thank you.

Your next question comes from the line of JJ Park of JP Morgan.

Hi, congratulations for the good second quarter number.

I have two questions.

Basically your guidance you are looking at the low- to mid-single digit growth in the third quarter, is it -- all the growth coming from the capacity growth?

Looking at the number you have around 3% capacity growth in the third quarter or if there is any upside in terms of utilization rate?

So you are correct, shipment growth is mostly from the capacity increase in third quarter.

And also we guided the ASP increase approaching mid-single digit percentage as well.

So utilization rate will be kept at the 100% in the third quarter?

Yes, yes.

Okay.

Also, in terms of the order visibility, compared to three months ago are you seeing the better order visibility in the third quarter?

Third quarter we have pretty much the visibility which has been provided as our guideline.

The third quarter should be totally visible.

But again the last quarter there are some company ups and downs and different applications have some ups and downs.

But overall Q3 is -- we have pretty much good visibility in there which has been guided in our guideline but (multiple speakers).

So among the three -- yes, among the three major applications, which one has the highest order visibility into the third quarter?

We think Q3 we have pretty good visibility for all three segments.

But again as we guided for the consumer segment it has a better momentum from UMC perspective, which is partly due to our optimization of our mix.

Okay, thank you very much.

Thank you, JJ.

(Operator Instructions).

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

Thank you for taking my follow-up questions.

Just I'd like to clarify what -- how much operating leverage you have going forward.

Third quarter you have given already low 30s gross margin guidance and product mix is maximizing probably it's going to have a 5% ASP increase, utilization rate is 100%.

Do you think that there is any other way you -- there is room to improve the gross margin if the economy remains strong?

Yes, we certainly will do that, there is no doubt.

It's ongoing efforts.

One thing is that we are adding more advanced capacity which we have been -- we just completed a brand new cleanroom, 12-inch adding now to the 40 and advanced capacities.

Also for the capacity mix that's a big deal, we are trying very hard to reach our capacity mix, even at the 8-inch and the legacy technology domain.

So there is lots of room.

We are continuously doing all kinds of things to improve.

Are you speaking -- where you like to look at your, say, breakeven utilization rate which is at 70s now, where you can get it to -- would like to look at in one year down the line or whatever way?

You are asking about an expected (multiple speakers).

Breakeven utilization rate, yes.

So this is -- that's a hard question to --

Breakeven, it's breakeven.

The breakeven?

Yes, breakeven utilization rate, because the economy is (multiple speakers)

Oh, breakeven rate.

Breakeven utilization rate at operating level should be below, for sure be below 70%.

And also the gross margin.

Gross margin level that should be in the mid 50 kind of percent.

Got it.

And my last question is your driver IC could you give some color on second quarter how many percents of revenue came from driver IC business?

In past around 10%, 10% I don't what -- it's about that level, yes, 10%.

10%, okay, thank you.

(multiple speakers) call next quarter.

Thank you.

Your next question is from Steven Pelayo of HSBC.

Thank you.

Just a couple of follow-ups here, every quarter I ask you guys about your diversification in customers and customer concentration.

So can you give us some color on that beyond the top three?

I don't know, what's your top 5 percentage of revenues now, maybe top 10, and any other thoughts on kind of more people becoming more significant for you beyond the top three.

So the top customers, each of the top customers they have a lot of different product lines, so we are even enriching, optimizing the mix among them, within themselves.

So the others are the new or smaller ones.

So overall speaking, the top, if you were to just look at the pure numbers it doesn't change quarter by quarter that much.

Well, I guess in the past you guys had said that you were looking to target more of the US fabless customers as a potential to try to gain some market share there.

Do you think you've been successful this cycle thus far?

US fabless.

I mean your share is relatively strong with the Taiwan fabless, so US is the next place to kind of go after.

I think we are engaging lots of existing customers on different segments and new customers as well.

So overall speaking, you are correct, we are trying very hard in those areas.

Okay.

And then on 40-nanometer I don't know if you gave guidance, it looks like your guidance was 65-nanometer, but what was your expectations for 40-nanometer 3Q and at year-end as a percentage of revenue?

40-nanometer today is capped by our available capacity, so we are limited by the existing and some incremental increase in 12A in terms of the existing cleanroom.

So we are still be able to add more 40 capacity.

The large amount of incremental change of capacity will happen next year.

Okay, so it still sounds like you'd even exit this year maybe in mid-single digits 5% or less or so?

Something like that, yes.

Okay.

And then I guess on the capital structure, I think a year ago, you guys had talked about paying down your loans.

But then I didn't hear the comments from the afternoon, you made some pretty aggressive comments about some dividend payout ratios.

So if you could restate those dividend comments and talk about how you'd likely fund those?

I think you're going to be free cash flow negative for the next couple of quarters with this CapEx.

Could you just talk a little bit about how that all would flow through balance sheet and cash flow statements?

We recently paid out all the remaining long-term debt.

And in the meantime we also paid out a little bit more than TWD6b in dividends.

The payout ratio in 2010 is actually more than 150%.

What I mentioned in today's afternoon session was we are in a position to stay a high payout ratio even going into 2011, and we intend to do so.

And some others were also asking about our policy toward treasury share buyback and my answer is also the same that we actually are in the same position to do frequent share buyback if we feel necessary.

In fact UMC probably is the most aggressive company in Taiwan to do share buyback.

So as for how to fund cash flows, you are correct, we probably will be a little bit cash flow negative this year.

But still we maintain almost zero long-term debt structure, with very low interest rate we can easily tap into the debt market if we want to.

Okay, great.

Thank you.

Thank you.

At this time, there are no further questions.

Mr.

Liu, do you have any closing remarks?

Yes.

This will be my closing, and thank you for your interest in UMC.

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