聯華電子 (UMC) 2010 Q3 法說會逐字稿

Welcome, everyone, to UMC's 2010 Q3 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 conference call for the third quarter.

With me today is CEO of UMC, Dr.

Shih-Wei Sun, and our IR manager, Mr.

Richard Yu.

During this conference 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 the Company's control.

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

Now I would like to start with the Q3 2010 business results.

For the third quarter of 2010, capacity utilization rate remained almost full.

Revenue increased 9.8% quarter over quarter to TWD32.65b from TWD29.75b in 2Q 2010, and increased by 19.1% year over year from TWD27.41b in third quarter 2009.

Gross margin was 32.6%.

Operating margin was 22%.

Net income was TWD8.72b and earnings per ordinary shares were TWD0.7.

The above is the short summary for the results on third quarter 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 third quarter operating results and share with you our general operating status.

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

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

Okay let's get started.

We are very excited about UMC's Q3 results.

UMC's revenue from the first three quarters of this year has already surpassed 2009's full year revenue.

Total earnings per ordinary share for the first three quarters were TWD1.4, with full year earnings for 2010 expected to grow significantly from last year.

Robust growth momentum for Q3 continued from the previous six quarters with capacity utilization remaining full.

Shipment volume reached a record of 1.202m 8-inch-equivalent wafers.

As a result third quarter revenue exceeded $1b with revenue and income from foundry operations both reaching six year highs.

UMC's accelerated advanced capacity expansion and product mix optimization continued to show positive results.

Revenue contribution from 65-nanometer and below products has reached 30% with 40-nanometer growing to 4.2% of revenue.

Return on stockholders' equity for the quarter reached 16.6%.

Looking ahead to Q4, advanced process capacity will remain fully utilized.

Product mix optimization will push blended ASP even higher.

We do expect that seasonality, NT dollar fluctuation and other uncertainties may slightly affect revenue but remain cautiously optimistic about the Q4 foundry market.

UMC will continue to closely monitor industry conditions in order to adapt to any changes.

According to UMC's initial budget projection for fiscal year 2011 next year's semiconductor industry outlook and the customer demand remain quite healthy.

UMC's $1.8b CapEx this year should significantly boost advanced capacity expansion in 28-nanometer and the 20-nanometer R&D enabling the Company to greatly enhance its competitiveness.

We will also continue our efforts on ROE and plan to deliver favorable dividend yield to UMC's shareholders.

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

Wafer shipments will decline by mid-single digit percentage due to seasonality.

Wafer ASP will show a mid-single digit percentage increase.

Revenue decline will be in accordance with NT dollar appreciation.

Capacity utilization will be in the mid to low 90% range.

UMC's gross margin will be in the low 30% range.

The computer segment will be relatively weaker than the consumer and the communications sectors.

Revenue contribution from 65-nanometer and below will be approximately 35%.

CapEx for 2010 will remain at $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 from Credit Suisse.

Yes.

Thank you.

Good evening.

The blended pricing you've had a good year for price and several good quarters.

[I want to see] as you negotiate out for 2011 what type of pricing environment you're seeing and whether you expect the strength to hold up.

And then as we look at the first quarter should we factor in the normal step down, annual step down in pricing into first quarter?

So, Randy, our blended ASP improvement that we have been discussing, it's mostly coming from our mix improvement.

So for next year, next quarter's pricing is all being discussed on a case-by-case basis now.

Okay.

We did guide on Q4 the blended ASP will continue to increase in the mid single-digit percentage range.

Okay.

And as you look to the CapEx you maintain $1.8b, but now you look ahead to next year, should we be thinking about roughly similar levels for spending?

And for your Phase 3 and 4 that you're starting to build out, if you could update us on how much headroom you have to expand capacity into those fabs.

So, as you know, we are expanding capacity in the Phase 3 of 12A very aggressively.

In the meantime we are expanding capacity in 12i and improve the mix in 12i in Singapore also in some of the 8-inch fabs.

Going back to the CapEx question we will guide next year's CapEx maybe next quarter.

But in essence, since UMC's profit earning capability has much improved so we'll be more aggressive in our CapEx looking forward, moving forward.

But we also have boundaries for the CapEx.

For example, with our profit and the depreciation, cash income, we will probably be able to sustain our CapEx without any equity financing.

In the meantime we can still provide our stockholders a reasonable cash dividend return.

That's the kind of general framework.

Okay.

Two follow-ups to that.

Could you discuss how depreciation would get affected fourth quarter and maybe a rough framework for 2011?

And then given the better earnings this year, a rough idea of what we should be looking at for dividends going into next year?

Randy, this is Chitung.

First of all, in terms of depreciation we expect something around TWD30b for the whole year 2010.

And Q4 should show a few percentage decrease quarter over quarter compared to that of third quarter.

And for the whole 2011 the final CapEx number for 2011 hasn't really finalized yet.

However, we do expect to see no more than -- up to 10% increase in the 2011 depreciation.

And as for the dividend, UMC intends to have a steady and healthy cash dividend flow.

We also intend to maintain a high payout ratio.

And someone was asking some mark off like 50% payout ratio during this afternoon's conference call.

And we think it's not too aggressive to use 50% as a beginning.

Okay.

Thanks a lot, guys.

Thanks.

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

Thank you.

Two questions.

First on the CapEx, is your decision-making process any different than prior years?

And I'm asking you this because by now it's obvious that some of your customers or customers of your customers have been going through some inventory adjustment.

So as we look into next year, not only we have -- not only such customers will have to figure out their restocking and also have to figure out the overall demand picture, so does that make the capacity planning this year any more difficult than prior years?

I think our capacity planning is really a multi-year, multi-cycle kind of effort.

So for example, we are discussing in generally about next three years overall Company's direction, etc.

So the near-term seasonality will not affect our long-term CapEx decision.

As I mentioned earlier, as UMC's profit-earning capability is getting stronger, we will consider that as well for our future investment.

And in the meantime, equipment availability is also better especially into next year compared to earlier this year, correct?

So actually our equipment procurement, we have a long-term road map with our major equipment suppliers.

It's really the whole, total consideration point of view.

Even actually in the past year we don't have much difficulty either.

As long as you discuss them with the equipment supplier long-term roadmap basis.

And just one question on the 8-inch 200 millimeter capacity.

I see more and more of Taiwan-based DRAM players increasing their foundry mix of their capacity and especially the same kind of trend is going on in Mainland China.

Does that worry you that at some point we could see a more-than-expected pricing pressure for the [8-inch] and also adverse impact on overall gross margin profile?

Not really.

This kind of a situation has been the case in the past many, many years.

It is really nothing new for us.

So you know in our 8-inch domain we are also working very hard to reach our mix.

For example, we are pushing our product on the capacity mix towards the more advanced 0.11 micron technology.

And also we are enriching our mix with many different specialty technologies that also include IDM outsourcing from 8-inch perspective.

So the impact should not be that much.

Got it.

Thanks so much.

Thank you.

(Operator Instructions).

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

Good evening.

First, congratulations on your very good results and execution.

My first question is more long term that it seems like this year we see your peers, TSMC, Global Foundries and also SMIC, have increased CapEx.

And also into next year based on what the equipment vendors are talking about it seems like foundries' CapEx will remain very high.

So I just want to see what is the long-term, mid-term strategy for UMC now for advanced technology for 12-inch going forward?

So, UMC's strategy in the past two years has been very clear, which is to provide customer-driven foundry solutions timely.

So from business perspective, we are working very hard to enhance our business composition, enrich our customer mix, product mix and technology mix and also lower the barrier for customer engagement.

And then capacity and technology-wise, capacity we are investing $1.8b this year.

And this will give us good revenue and with good profit earning capability.

So the capacity we invest today has to be supported by later adequate capacity and revenue growth and profit.

Technology-wise we have been doing the technology development by ourselves, which has been very successful so far with the rollout of the 65-nanometer capacity and also business ramping.

For 40-nanometer we are ramping also.

Today it's capped by our supply constraints, so we are releasing the 40-nanometer capacity.

So everything moves along pretty well.

On 28-nanometer we have eight firmly engaged customers doing Poly/SiON and High-k metal gate.

And actually as we are speaking today, this month, we are launching and taping out another High-k metal gate 28-nanometer shadow program with many customers IP and test circuits on the shadow.

So moving forward, as I mentioned earlier, UMC's profit-earning capability has improved.

So we will look at our CapEx situation more carefully moving forward, provide timely and adequate capacity and technology where we can add value to our customers.

Great.

Can you give us some color on 12-inch ROE given that you have been running at full capacity utilization at 12-inch for two to three quarters now?

And also the ROE for 8-inch?

If not ROE, maybe margins so that we can see how the 12-inch profitability is progressing.

We cannot really give you this number because it's really dynamic.

And what we can say is that our 12-inch wafer margins is at all-time high and it's continuing to improve.

And currently our 8-inch margin because of light depreciation expenses, it's still higher than that of 12-inch.

But 12-inch has been the key drivers for overall profitability improvement.

In the past year the 12-inch ROE has been improved quite a bit.

Yes, I'll ask the last question.

For 12-inch you just commented that there are several things that you're doing which is quite -- it's working very well.

Can you give more color on each of the items you are doing?

For example, you said lower the customers' effort to engage UMC.

Can you explain like in detail, more in detail?

So I think every customer has their thoughts and their strategy.

Basically customer by customer we are just trying to consider from their -- in their shoes, providing true value in their supply chain where we can have a win-win growth together.

In some other cases, maybe they have a different strategy and with our UMC position, we may not have some common denominator.

In those cases, we may just look elsewhere.

So those kind of adjustments and the mix improvement really helped us a lot in the past year and two.

Great, thank you.

Is there any 10% customers in the quarter?

If so, how many are there?

We mentioned we now have seven 5% and above customers now, which is also an improvement from the past.

I see.

Great, thank you very much.

Thank you, Donald.

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

Hi.

Thanks for taking my question and congratulations on a very good set of numbers this quarter.

I have a few questions really.

First of all, do you -- I notice that the revenue contribution from IDM has been going up.

It actually went up pretty noticeably in the third quarter.

Do you see that growing, the trend to continue?

If that's the case, can you comment on the drivers for this trend?

And the second question is do you have an internal target regarding your global market share, say, next year?

So the IDM number this quarter is somewhat higher.

Yes.

Certainly, IDM outsourcing for the [wafer] technology in 12-inch has been happening for years.

This is actually no different, they're just continuing.

However, last year's global economic crisis really helped IDM to outsource their 8-inch also.

So we are definitely benefiting from that.

Whether or not it's just a fluctuation or it's a trend, we have to look more quarters, since the fabless is also growing strong.

Yes, okay.

What about -- do you have an internal target on your global market share next year?

Do you have a view on your market share this year in the foundry space?

It's getting more difficult to track the market share for foundries because some foundries they don't have the public information.

But last year we definitely gained market share very clearly during the global economic crisis.

And this year the numbers is sometimes difficult to get hold of.

But I think we are holding up pretty good.

Okay.

What about the market share within Taiwan this year?

Market share?

We don't track those I think, just three of us.

We will have to look into that.

Right, it's easier to track.

It's public information.

But I think we are doing pretty good.

Okay.

And how do you see next year?

Do you intend to maintain your existing market share or you want to expand your market share globally?

We discussed also in this afternoon, in the past two years, our focus is really to return good cash dividend yield to our stockholders.

The return on equity is our number one priority.

However, during the process when we focused on the ROE and also provided customer-driven solution and service, actually our market share also gained last year.

So it's not a trade-off.

Okay.

And actually my final question is do you have an internal target regarding the revenue contribution from advanced technology nodes, 65-nanometer.

So for example, next quarter we are guiding 35% for 65-nanometer and below.

Internally we do have numbers for next year, but we will guide you quarter by quarter.

Okay, thanks.

Thank you.

You have a follow-up question from the line of Mehdi Hosseini from Susquehanna.

Thank you.

My follow-up question has to do with your prepared remark regarding the Q4.

You said that the PC market is the weakest relative to consumer and communication.

My question is can you provide some color what specific area in PC that is weak.

And number two, is this a kind of weakness that was anticipated in the rolling forecast a few months ago or is that a recent change to your expectations?

There are actually two aspects on this migration.

The PC has been in general weak and this is well publicized and well reported in the media and the reports.

But as I mentioned earlier in the afternoon, actually very recently it seems they are picking up a little bit.

But in general PC is just weak.

But on the other hand you know the tablet and other touch-screen-based tablet and smartphones are getting very strong and luckily UMC is also part of the supply chain for these segments.

So for us it's where we are doing pretty good.

But also from -- the second aspect is for example, the mix improvement for UMC.

In the past, in computer segment we have been trying to do some mix improvement in our overall structure.

So this is just in general, computer segment is slightly weaker in Q4.

Okay, thank you.

Thank you.

(Operator Instructions).

Your next question comes from the line of Lionel Lim of HSBC.

It's actually Steve Pelayo from HSBC.

Thanks for taking my question.

I'm just playing around with my model and I'm trying to think about next year.

Your depreciation costs I think you've already guided them growing.

If I remember, I think it was 10% to 15%.

You might correct me there.

But I'm curious does that come through fairly steady or as we get into the first quarter do we see a step up in that quarterly depreciation in your cost of goods sold?

It's approximately up to 10% increase and it's kind of linear.

It's not like any special jump in any given quarter.

Okay, so fairly smooth then.

And then also looking into my model, if you could comment on next year's tax rate as well as some thoughts about next year's non-operating income line.

If we think about this year, you just had a very large benefit in the third quarter.

You had a lot of those portfolio companies who are probably going to be paying you even larger amounts next year.

So should I be thinking about 3Q 2011 having an even higher non-operating income benefit in 2011?

I think it's a bit too early to talk about non-op in 2011.

However, our goal is certainly to continue to divest our non-core holdings, which is still rather substantial relatively.

So we should still expect to see some kind of disposal gains in 2011 unless the stock market goes very differently.

And as for the tax rate, the minimum tax in Taiwan for tax for any company is 10%.

And given our accumulated tax credit we expect we can enjoy 5% to 10% tax rate for the next few years.

Okay and then just a couple of quick questions on capacity.

You guys are ramping up 12A Phase 3 and 4.

Could you give me some milestones along the way there?

Where do you think that will be in mid-2011 and end of 2011?

So we are now ramping Phase 3 only in 12A.

And today we are, for example, by the end of this year December, we should have around 1k per month output from Phase 3 of 12A.

You think that goes by mid next year?

We will continue throughout the year next year and forward even to 2012.

But the numbers I don't have it.

I guess I'm just trying to understand, a year from today will that Phase 3 be running another 10k, another 15k, 20k?

I have no idea.

What type of range would you be thinking about?

With adequate business, we want to ramp up to 20k as soon as we can to reach good economies of scale.

But I don't have the exact schedule and time next year.

Okay, excellent.

Thanks, guys.

Thank you.

(Operator Instructions).

At this time there are no further audio questions.

Mr.

Liu, I'd like to turn it over to you for closing remarks.

Thank you and thanks, everyone, for your interest in UMC.

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

And, operator, back to you for the closing remarks.

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.