聯華電子 (UMC) 2011 Q1 法說會逐字稿

Welcome to UMC's 2011 Q1 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.

(Operator Instructions).

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 like to introduce Mr.

Richard Yu, Head of Investor Relations at UMC.

Mr.

Yu, you may begin.

Thank you and welcome to UMC's conference call for the first quarter of 2011.

With me today is the CEO of UMC Dr.

Shih-Wei Sun and the CFO Mr.

Chitung Liu.

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 the ROC Securities Authority.

I'd now like to introduce UMC's CFO, Mr.

Chitung Liu to explain Q1 2011 business results.

Thank you, Richard.

For the first quarter of 2011 revenue was TWD28.12b, a 10.2% quarter-over-quarter decrease from TWD31.32b in Q4 2010 and a 5.3% year-over-year increase from TWD26.72b in Q1 2010.

Gross margin was 27.5%.

Operating margin was 15.8%.

Net income was TWD4.48b and earnings per ordinary share were TWD0.36.

About this short summary for the results on quarter one 2011, 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, ladies and gentlemen.

In Q1 2011, wafer shipments reached 1.12m 8-inch equivalent wafers.

Capacity utilization was 90% with revenue in line with our projections.

For Q2, we have tempered our expectations for revenue and profit since more time is needed to accurately assess worldwide semiconductor demand due to Japan's March 11th earthquake and its impact on the global supply chain.

With regard to UMC's own operations, the Company's supply of raw materials and equipment components remained secure, while production at our UMCJ factory in Tateyama, Japan, recovered in minimum time.

Following the quake, we promptly allocated resources to support customers' demands, while also assisting suppliers and partners that sustained earthquake damage with needed materials and supplies to help accelerate supply chain recovery.

The next several quarters involved several uncertainties such as the schedule for supply chain recovery, inflation in emerging markets, European sovereign debt, and exit of the US quantitative easing program.

These factors may potentially impact the global economy as well as UMC's performance in the second half of the year.

Nevertheless, UMC remains optimistic about mid to long term foundry growth and will proceed rationally with financial discipline.

To ensure our core competitiveness, the Company is moving forward as planned with R&D and capacity expansion for advanced technologies.

Revenue contribution from UMC's volume production 40-nanometer technology is expected to continue growing in the second half of 2011.

28-nanometer R&D collaboration with customers is also progressing smoothly and is scheduled for pilot production by mid-year.

To maintain favorable ROE, the Board of Directors has proposed for shareholder approval a cash dividend payout of TWD1.12 per share.

Going forward, we will further improve technology and service quality to enhance the Company's performance for the maximum benefit of customers, shareholders and UMC.

Now let me provide you with the guidance for the second quarter of 2011.

Wafer shipments and ASP will remain flat.

Capacity utilization will be in the mid 80% range.

Gross margin will be in the low to mid 20% range.

The consumer and the computer segments will outpace the communication sector.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thanks.

Certainly.

(Operator Instructions).

Your first question comes from the line of Mehdi Hosseini of Susquehanna International.

Please ask your question.

Yes, thanks for taking my question.

Regarding the updated Q2 guidance, how should we interpret that?

Does that mean that some of that wafer shipment is being pushed from Q2 into Q3 and would that make Q3 better than seasonal pattern?

And the second question has to do with the CapEx.

Given the change in wafer shipment pattern, has that have any impact on the overall CapEx budget for this year?

So I'll answer the latter question first.

CapEx stays the same, TWD1.8b and the CapEx is longer-range arrangement for our advanced technology commitment and expansion.

In the past few -- two years actually we have been relatively disciplined in our CapEx and it's in line with our customary requirements in the 40 -- especially in the 40 and 28-nanometer requirements down the road.

The earlier question is -- was about the Q?

Q3.

If --

No, this is just a -- clearly just our Q2 guidance.

And there are certainly some factors about the -- sorry, your question was about the push out.

We are not considering any push out and we are not giving guidance for Q3 either.

Right.

But qualitatively, Q3 could potentially turn out to be better than seasonal especially with the build-up of back to school and holiday season after that.

So directionally, with the lower base in Q2, Q3 could mathematically look better than seasonal.

Is that the right way of thinking about it?

That's why in our description earlier, after the Japanese earthquake the uncertainty becomes much higher.

And we need approximately one more month to clarify the demand situation.

And after the earthquake certain customers they are pulling in orders to build more inventory and are concerned about the shortage of components.

On the other hand, some other customers they are stepping on to the brakes, worried about the end system level product ship out being delayed due to the shortage of the key components.

So it's a very kind of a complicated situation at this moment.

Also I mentioned earlier about the inflation situation in the emerging markets and the European sovereign debt and actually you have the US quantitative easing programs.

So these are all creating uncertainties down the road.

So we are trying to be on the conservative side and we need about one more month to see a better situation in the second half.

Okay, thanks.

And just back to CapEx very quickly, is that equally distributed throughout the year or is that front-end loaded?

For this year, the capacity release is front-end loaded.

Okay, great.

Thank you.

Thank you.

Thank you.

And your next question comes from the line of Randy Abrams of Credit Suisse.

Please ask your question.

Yes, good evening.

I wanted to -- another try at what you're seeing for the flat guidance for second quarter and I guess within that comps will be declining.

Could you maybe talk a bit more about I guess the customers that are pushing out or delaying orders?

How much of that is slowing demand or inventory related?

Is any part of that a supply issue -- I guess from what you can assess today, what you're seeing?

I guess you meant the supply issue from the earthquake?

Yes, from the earthquake.

Yes.

So for us we have been managing the supply side very well.

The silicon wafers, the metal targets, resist, masks and chemicals, they are all well managed.

We are managing.

We don't have any material impact from the supply side.

So the flat guidance mainly reflecting the added uncertainty down the road.

And as I mentioned earlier, after the earthquake, the inventory situation in the supply chain we felt they are being shifted.

Some are more aggressively adding inventory.

Some are really concerned and trying to drain the inventory.

So it's a more complicated situation.

We are still trying to understand more clearly and we need about one more month to see a better picture for the second half.

Okay.

And maybe on more UMC-specific, if you look at 40-nanometer, how quickly do you see that ramping through the year?

And if you can maybe look out to the next node, some of the applications like graphics or PLDs, do you see any potential to come back in as second source for some of that business as the nodes mature?

So in general 40-nanometer and 28-nanometer engagement, we are adopting a very customer-driven and trying to lower customers' engagement barrier.

So they are pretty good.

40-nanometer, we are still targeting to reach 10% of our revenue in the second half of this year.

28-nanometer we are having -- we are scheduled to have a customer product pilot around the middle to around early Q3 this year.

Certainly they include certain application processor and other applications.

As far as multi-sourcing, we are in a great position.

For example, 28-nanometer high-K metal gate we are adopting the gate-last high-K metal gate approach, which is very popular and aligned with the mainstream logic technology.

Okay.

And the last question I had, I think there was some press about the salary increases perhaps around 7%.

Should we start to assume OpEx -- or how do you see R&D and SG&A tracking over the next few quarters?

And should we track -- start seeing labor costs rising at a faster pace?

Well, the labor cost increase happen every year and from a percentage of cost of goods sold OpEx point of view, it's really not that significant.

So I think the main factor still will be on our depreciation this year.

And the depreciation, as we discussed before, we expect to see no more than 10% overall depreciation expenses increase this year, with the peak maybe -- peak of increase maybe happen in quarter two.

Okay.

Thanks a lot.

Okay.

Thank you.

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

Please ask your question.

Great, thanks for taking my questions.

First, can you talk a little bit more about ASPs?

What gives you confidence that ASPs should hold flat sequentially in Q2 after declining in Q1, especially given how it seems like 65-nanometer pricing has gotten a lot more aggressive in the market?

So ASP is mostly a factor of our product and technology mix quarter after quarter.

So, so far, as you know, the Q1 situation usually at the beginning of the year we have some -- usually we have some adjustment for the ASP itself within the node or within the technology.

But overall speaking we are also trying very hard to improve and enrich our technology and the product mix.

That's how we're balancing out ASP.

Okay.

Could you talk a little bit more about 65-nanometer pricing in general?

Are you seeing an unusual level of aggressiveness from some of your competitors there?

Again, pricing is negotiated case by case and in the long run I don't see any major difference.

Again, the pricing, usually when we discuss with our customers, we are on a road map kind of basis, or more on a long range instead of spot market kind of a deal.

Okay.

And then maybe just following up on an earlier question, not looking at cost of goods sold, but just looking at your operating expenses, R&D, SG&A, how should we be thinking about operating expenses in Q2?

For the coming quarter, the June quarter, we expect to see a few percentage increase in operating expenses due to the factor of salary increase we just highlighted as well as summer tariff for electricity, which will become effective in June.

Okay.

Okay, great.

Thank you.

Right, thank you.

And your next question comes from the line of Mahesh Sanganeria of RBC Capital Markets.

Please ask your question.

Thank you.

You mentioned that the response to the Japan earthquake has been some customers are pushing out and some customers are pulling in.

Can you talk a little bit about certain -- which verticals or which segment or which markets you're seeing these trends as to who is pushing out?

I mean Broadcom yesterday talk about weakness in the handset and smartphone market.

So if you can give us some color that will be helpful.

I really cannot talk about any specific customers.

It's really depending on customer's position in the supply chain and also for the different applications, if they are closer to the end or it's on the upper stream.

So it really varies a lot.

Even customers' inventory situation, some customers' inventory are actually dropping; some are increasing.

So overall speaking, Q1 and Q4, if you average everything out, it's similar at the inventory level.

But I think in the long run, still the global macro economy determines the overall final demand of the semiconductor business.

Is it fair to say that in general, the handset and tablets you're probably seeing some push out and on the PC side, you're seeing some pull in?

I cannot make that assertion at this moment.

Actually, it's changing so fast.

The PC was a little bit weak but now we are seeing some strength.

So it's changing very fast, very dynamic.

And one more quickly.

If you can give us some color on your utilization.

I'm not looking for a precise number by technology node.

Is it mostly 40-nanometer higher utilization and 90 lower?

If you can give us some qualitative.

In general, 8-inch utilization is better than 12-inch.

One reason is that we are adding so much capacity in Q2.

We are adding -- total UMC we are adding over 5% capacity in Q2, mostly 12-inch and advanced capacity.

But in the meantime our engagement of 40 and 28 are very good compared with past nodes.

So overall speaking, that's the situation.

Okay, thank you.

Thank you.

Right, thank you.

(Operator Instructions).

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

Please ask your question.

Thank you for taking my question.

My first question is on spare parts of equipment.

Since some of the spare parts do come from Japan, do you think any bottleneck may happen if some of the spare parts for your existing equipment doesn't reach sometime, or you think that your spare part supply is unsecured?

Our spare parts in the raw materials at this moment they are all secure, almost pretty much through the year, so there's no major issue.

I mentioned the raw materials earlier.

For equipments, we do have some Japanese provider -- supplier in the earthquake region.

But it's just some -- I think mainly due to the transportation right after the earthquake.

But those delays are well within one month, so it's very much manageable at this moment.

Okay, that's clear.

The second one is on could you give some color on the linearity on the second-quarter shipment or sales?

It's about flat.

Flat.

Okay, got it.

Then do you have any plan to push out any of the capacity expansion on second half of this year?

No, not at this moment and you know our capacity expenditures in the past two years I think we are on the disciplined side and our mid to long term demand are there.

We need to take this good opportunity to actually accelerate R&D and move forward on the advanced capacity deployment.

Okay, got it.

And my last question is on He Jian.

I think you have increased price.

Could you elaborate a bit, like what type of valuation metrics you have used to increase the offer?

Okay.

Hi Pranab, this is Chitung.

We didn't increase the price.

There are two class of He Jian shares, Class A and Class B and the original combination we hoped to get was 50% Class A and 50% Class B and that all add up will be around $87m.

But the Class A shares is currently under restriction by He Jian's Board to be transferred.

So it looks like if the He Jian Board did not change the rule, we can only buy Class B for now this time.

And Class B has higher nominal price and higher cost.

So we may have to increase the ceiling if we also want to buy up to 30% of Class B shares only.

But the total value we will pay eventually for 100% of the He Jian shares remain unchanged.

It's just we buy the mix of Class A and Class B.

This time will be pretty much all Class B only.

Okay, got it.

Okay, thank you and have a good quarter ahead.

Thank you.

Thank you.

There are no further questions at this time.

I'll now hand it back over to Mr.

Richard Yu.

Thank you for your interest in UMC.

That I think pretty much concludes our call today.

Please feel free to contact us directly if you have any 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.

Good bye.