聯華電子 (UMC) 2012 Q1 法說會逐字稿

Welcome, everyone, to UMC's 2012 first-quarter 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 is now being broadcasted live over the Internet.

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

Please visit our website, at www.umc.com, under the Investor Relations, Investor Events section.

I would now like to introduce Mr.

Bowen Huang, Head of Investor Relations at UMC.

Mr.

Huang, you may begin.

Thank you and welcome to the UMC's conference call for the first quarter of 2012.

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 the risk that may be beyond the Company's control.

For these risks please refer to UMC's filing with the SEC in the US and at ROC securities' authorities.

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

Chitung Liu, to explain UMC's Q1 2012 business results.

Thank you, Bowen.

For the first quarter of 2012 revenue was TWD23.77b, a 2.7% quarter-over-quarter decrease from TWD24.43b in Q4 2011 and a 15.5% year-over-year decrease from TWD28.12b in first-quarter 2011.

Gross margin in this quarter was 19.1%, operating margin was 5.6% and net income was TWD1.34b.

And earnings per ordinary shares was TWD0.11.

Above is a short summary of UMC's results for Q1 2012.

More details are available in the 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 2012 UMC's profitability and revenue exceeded our expectations.

Wafer shipments reached 963,000 eight-inch equivalent wafers, bringing overall capacity utilization to 71%.

Revenue contribution from 40 nanometer increased to 9%.

For the second quarter we expect wafer shipments to increase 15% as communication and consumer IC demand grows.

This projected growth reconfirms that the economic cycle trough seen in the first quarter signaled that the semiconductor industry's multi-quarter inventory correction has subsided.

UMC is progressing smoothly on our advanced 28-nanometer process technology.

We have successfully delivered 28-nanometer flagship product samples to mobile communication and computing customers, with additional product tape-outs during last quarter.

We remain on track to enter volume production for UMC 28-nanometer process in the second half of 2012.

Meanwhile, to effectively utilize the existing 65-nanometer and 90-nanometer capacity we are developing numerous specialty technologies to deliver more diversified and comprehensive customer foundry solutions for the future.

We are optimistic about the semiconductor industry's long-term development.

To solidify UMC's profitability and business growth we will continue to follow the Customer-Driven Foundry Solutions philosophy that involves internal technology R&D to fulfill customer needs.

Moreover, we are actively building sufficient capacity for 28-nanometer technology and believe that this node will enhance UMC's customer and product mix, average selling price and profitability once volume production begins.

In the meantime the Board of Directors has proposed for shareholders' approval of a 2011 cash dividend payout of TWD0.5 per share.

The resolution would maintain a 60% cash dividend payout ratio even after this year's aggressive capacity expansion plans.

Looking ahead into next quarter, our consistent efforts will be directed towards timely management of customers' advanced capacity needs and completing all necessary 28-nanometer preparation for volume production in order to maximize benefits to customers and UMC.

Now let me provide you with the guidance for the second quarter of 2012.

Wafer shipments increase approximately 15%.

Wafer ASP in US dollars will remain flat from previous quarter.

Gross margin low 20% range.

Capacity utilization low 80% range.

The communication and consumer segments will outpace computer segment.

There concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thanks.

(Operator Instructions).

We'll pause for a moment to compile the Q&A roster.

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

Yes, thank you.

Good evening.

I wanted to follow up on a point you mentioned this afternoon, where you talked about having a bit more capacity on 28 nanometer above the 5%.

I think you're targeting for revenue on 28.

Could you talk about how much business you could support for 28 based on the CapEx you're targeting to 28, and potential to pull in any additional business for 28 this year?

So the only think I can share with you that we are providing sufficient capacity to support a 5% revenue percentage by the end of the year.

For the exact capacity number I cannot share with you at this moment.

Okay, fair enough.

And on the 40 nanometer I think you mentioned the mix would be -- because all nodes are ramping, 40 nanometer will still be about flat at about 9% of sales in second quarter.

Could you talk about the applications coming in that may drive it toward -- I think your target's 15% by year end, the type of applications coming in on 40?

40 nanometer, as I mentioned in the afternoon, we have over 80 tape-outs covering all 3C applications, certainly, the leading communications, hard disk drive, base-band application processor, almost everything.

It's very typical for the foundry to grow this into a serious node.

Okay.

And on the 28 nanometer I wanted to see, I guess, your confidence on indications you're getting from your customers, how committed they are to ramp up your 28 process.

And I guess, the take, it sounds like TSMC is going to raise CapEx significantly.

But just if the indications you're getting [still] confidence [in] the business coming through if TSMC gets more aggressive on their additions.

I think for 28-nanometer engagement with customers these are serious long-term engagements.

Certainly, we -- UMC has to earn our business, so we are working hard, diligently working with these customers.

But these engagements are not [there], as I mentioned earlier.

It's very difficult to become a spot market engagement, so we are very serious from both sides.

It's a huge investment from them and from us.

The progress is so far on track, but it's very challenging.

But we are working very hard to earn their business.

Okay, no, I appreciate that.

And final question I have is on the -- the Board, I think, renewed the private placement plan, which I think two years ago you floated potential to look for a strategic investor.

If you could clarify do you have any interest in the equity fundraising, or is it a bit more you're going to target just [that] fundraising as you look forward to fund the CapEx?

Well, it's really looking for strategic partners more than anything else.

So if it is not really strategic by, say, the perception by the investment community we will not do it.

So it's definitely not for the purpose of fundraising.

Okay, no, thanks a lot, guys.

Thank you.

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

Yes, thanks.

Mehdi Hosseini, Susquehanna International.

Going back to your customer engagement on 28 nanometer, there are different types of 20-nanometer process technology.

And with the volume capacity not available until second half how are you going to be able to convince customers that your recipe is going to be adequate for different customers' requirements, especially when customers are looking for a second source?

I mentioned in the afternoon conference call during the past quarter we have delivered thousands of functional engineering samples, 20-nanometer node to multiple customers, including mobile communication and mobile computing.

Okay.

And these are all based on 28-nanometer Poly SiON, right?

Different versions it's true (multiple speakers).

And also I mentioned in the afternoon we will have a 28-nanometer high-K/metal gate, also gate-last because UMC's the --

Yes.

-- one of the few offering gate-last high-K/metal gate, so we have customer products -- product taping out there in the summer time for a high-K/metal gate.

Right, so -- well, I guess what I'm trying to figure out is foundries in Taiwan are based on gate-last.

Other foundries are based on a gate-first 28 nanometer.

So are we going to just wait for customers to figure out how the end product going to perform to figure out differences, or is there any difference that we need to monitor as competitors outside of Taiwan ramp significantly?

I think that gate-last will be the only version for process at 28-nanometer node.

So it gives us a good advantage.

If we get used to the gate-last at 28 nanometer then we can easily migrate that into a 20-nanometer offering.

As far as gate-first, they have a different category of customers.

They are also doing fine.

All these are new -- advanced technology takes a long time to engage.

Sure.

If you work hard enough it will work out well.

Yes, okay.

So is it just a matter of fine-tuning for a specific product, and especially customer, to make sure that the yields are reasonable now, so functional performance is adequate?

Sure, sure, different choices, yes.

Okay, and then at what point are you going to accelerate your R&D for 20 nanometer?

20 nanometer, actually, today we have two big partners.

So other than -- actually, today most of our R&D efforts are towards 20 nanometer.

28 nanometer is really on a yield-enhancement stage now.

So it's a treadmill.

It's a drum beat for us.

So we are heavily on 20.

So 20 is not only -- as I mentioned earlier, not only gate-last, it's also high-K-last.

Right.

Also we are going to use the [slot contact] double patterning, [shortest mask] optimization.

So a lot of the things are ongoing, so the progress is pretty good.

Would you be -- would you have a pilot line available by some time maybe second half of next year?

It's already existing in our 12-inch line at 20 nanometer.

For 20 nanometer, okay.

Yes.

When -- so, let me rephrase my question.

Would --

It's an R&D line.

It's an R&D line, yes.

Right.

Would capacity be available second half of next year, or is that more of 2014.

We haven't planned that yet.

We are focusing on the development at this point of time.

Got it, okay.

Thanks so much.

Thank you.

Your next question comes from the line of Robert Lea of Jefferies.

Okay, thanks for taking my question.

Just going back to the 40 nanometer, I just want to confirm what you did say in this afternoon's conference.

So as a percentage of sales 40 is going to be roughly -- or remain flat at 9% in Q2?

Is that what you said?

And also did you provide any updated guidance for 40 nanometer by the end of the year?

Yes, I think I said that for Q2 40 nanometer -- 40 nanometer will also grow --

Okay.

-- on absolute revenue number.

In absolute terms, sure.

But as a ratio of our revenue.

Because everything in Q2 is pretty -- going up pretty strong.

So the ratio of our revenue at this moment I think is about the same.

I don't have the exact numbers.

Okay.

But as far as the year end the internal target is 15% of our revenue.

It's still our internal target.

Okay.

And given this node has been in production for about two years now --

Yes.

-- I guess -- have you seen any change in the appetite for customers for 40 nanometer, I suppose, particularly given the very strong demand for 28 at the moment?

Are there any signs on some customers actually looking to defer from going to 40 and effectively skipping the node and going straight to 28?

Do you think that's a relevant factor at play here?

Yes, certain customers it's very typical.

[Everybody know] that if you are a latecomer the design, investment and infrastructure setup are so expensive.

So if you are a little late and you see the next node is getting more mature -- especially we have a 28 nanometer Poly SiON node.

Process-wise it's very similar or consistent with 40-nanometer, high-performance process.

So certain customer may select to jump nodes; it's happening.

But it was -- it depends on the application.

So it will still be a very strong node.

Okay.

Does that leave you exposed financially at all, given the R&D investment and CapEx investment you've put into 40?

Or is it possible to just update that and upgrade that straight to 28?

Actually it's -- as I mentioned earlier, it's a one-two punch.

The 40-nanometer, high-performance process, having the silicon (inaudible), will just carry over to the 20-nanometer low power.

So for us it's a continuous effort.

As far as the capacity arrangement, yes, we need to be very careful how to optimize the best profile from customers and product mix.

You're right, indeed, these technology nodes are really moving very fast.

Sure.

Can I ask a different question just on the gross margins in the first quarter, because clearly they came in a bit better than originally expected?

Trying to work backwards, it appears that the non-depreciation cost per wafer was actually a bit better than expected and you saw some considerable cost savings on that front.

I just wanted to know if you agreed with that and, if so, what drove down that non-depreciation cost per wafer.

Was there some exercise, or was it mix related, or what really drove the better margin there?

I think it's a bit of everything.

And other than the lower depreciation expenses in Q1 the non-depreciation cost is coming down because of our internal costs-down effort.

And overall the volume in quarter two pick up significantly and that share part of the fixed costs in Q1.

So they also contribute some of the better than originally expected gross margin.

Okay.

To what extent does your product mix also play a part in the gross margin?

Because if I look at the Communications as a percentage of sales, obviously, that came down from about 60% to 49%?

Now, I guess some of that is seasonality.

But I guess given a lot of your Communication customers have greater exposure to feature phones, which is a sector that is suffering quite a lot of margin pressure at the moment, would you agree with the point that lower Communication sales is actually beneficial to your margin?

Is that relevant at all?

No, we don't think that's relevant.

I think it is still coming down to the blended ASP --

[The costs there].

-- and loadings and our cost-down effort.

Okay, and one final question.

With the resolutions -- the Board resolutions passed on the potential equity and debt issuance, can you just confirm are you just -- are these completely new plans and new resolutions, or are you just updating prior authorizations on both behalf?

Is just a rollover of the authorization?

For the straight bond issuance is new.

We haven't really issued corporate bonds over the last 10 years.

And the interest rate is actually pretty attractive right now in Taiwan based upon NT dollars.

So we want to tap into the market to fill the gap for our cash flow this year and, to some extent, also prepare for the CapEx next year as well.

As for the strategic investor, it's really just to get our option open and get the red tapes done at the AGM.

And UMC has been talking to potential strategic investors all along for the last few years.

And we will only do the private placement to strategy investor if majority of the investor perceive or agree it is strategic.

So we have very high standard in terms of our potential investor -- strategic investor target.

Okay, and one final question, if I may.

What sort of visibility do you have into the third quarter currently?

And what are our thoughts on the third quarter?

Will we see normal seasonality coming through?

At this moment we don't have guidance for the third quarter, but if you look at our foundries, historically, Q3 is foundries' high season, so -- but as far as the guidance let's wait for the next quarter.

Yes.

Because I guess -- on the macro front, depending on which area of the world you look in, there is still a lot of pressures in Europe and, obviously, China is slowing down, although the US has showed some signs of improvement.

So it's still quite a -- it seems to be quite an uncertain environment out there and I just wondered what your -- all your customers were seeing, or what your thoughts were on that.

Your assessment is consistent, but our customer -- again, Q3 number we have to give the guidance the next quarter.

Okay.

All right, thanks very much.

Thank you.

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

Hi.

Dr.

Sun and Chitung, good evening.

My first question is on 28 nanometer.

You commented you have delivered the first silicon -- the silicon to customers.

Can you comment on the potential yield?

And also if by end of the year you ramp up 28 nanometer do you think that part of the revenue will be -- when will that part of the revenue be margin accretive with the yield curve improvement etc.?

So that's my first question on 28.

The second question on 28 is Qualcomm, I think recently, in the last earnings call, have highlighted the severe shortage of 28 nanometer, but also commented that it's trying to potentially change the business model with foundry partners a little bit.

So have you seen any change from the way you are working with customers, for example, in terms of more strategic collaboration, more technology or process transfer, those kind of things?

Thank you.

For the first one, the 28-nanometer yield, I cannot give you the yield number, but I mentioned in the afternoon our hard yield -- our hard defect yield are pretty good, I think, there.

So we are spending lots of efforts working on the soft yield, which mean -- which means the voltage dependent or testing, or process device and circuit matching kind of yield improvements.

So we are at that stage.

So we are working closely with customers on those challenges together.

It's a very difficult and challenging node.

Also you mentioned margin accretive.

Since we believe if we can earn our business timely -- especially at this node you mentioned we also heard there was a shortage on this node.

We believe it should be -- we expect it should be margin accretive if we can deliver on our business timely.

For the second question you -- we are not going to make any comment on a specific customer.

But our 20-nanometer engagement is pretty exciting.

We are having both technologies, one is the Poly SiON, the second one is the gate-last high-K/metal gate.

The foundry can really deliver this technologies with adequate capacity and service limit.

So we would like to grab this great opportunity to provide our best service to our customers.

Okay, great.

Thank you.

Thank you.

(Operator Instructions).

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

Thank you very much.

I have a question on 28 nanometer and 22 nanometer.

Can you talk about how many double-patterning steps are required for 28 nanometer and 20 nanometer, and how the cost is increasing as you move from 40 to 28 to 22?

I would assume that that [core] cost is going up pretty significantly in terms of -- if you can describe in terms of costs -- capital costs for 10,000 wafer capacity?

So the -- for the 20-nanometer double patterning all the metal layers require double patterning, all the metal and the [rear] layers, so that's many layers.

All the gate patterning needs double patterning.

In certain design rule and applications even the active layer needs double patterning.

So many layers need double patterning.

In terms of the cost I can -- I guess I can give you a rough -- my personal feeling for the -- from 28 to 20 the investment, the capital, I guess 50% more should be a rule-of-thumb number.

So it's very expensive.

Okay, so if you say there is that many double patterning and the overlay requirement is going to be, of course, very demanding and that will mean a lot of reworking, what do you think the yield that you can achieve?

I would think that the yield you can achieve with that kind of complication is going to be much small even when the process mature.

And so I'm wondering do you think that you can get the return on investment on that kind of complicated process technology?

As far as the -- they are multiple questions.

So you talk about the overlay; that's why you need to buy the latest immersion scanners from the vendor.

They have much better overlay.

They produced these new scanners just for the purpose of double patterning.

As far as the investment -- so everybody needs to do business with a reasonable profit.

So the supply chain, how we divide the profit and share the burden, is definitely an industry challenge together.

So I agree with you, it's a challenge, but I think by the time we are getting there, so collectively we should find some solution together.

Okay, thank you very much.

Thank you.

And your next question is a follow up from the line of Donald Lu of Goldman Sachs.

Hi, a follow-up question on the OpEx.

I think in the afternoon maybe you mentioned that OpEx might increase during the year.

Can you give us more color on the magnitude and where it will be increased?

Is it from R&D, SG&A, etc.?

Thank you.

Yes, for the time being we are expecting 15% wafer shipment growth in the second quarter.

And we do expect the related costs in the operating expenditures should likely to grow somewhat in line with our top line.

So percentage of revenue-wise should stay somewhat flat, but in absolute dollar terms we do expect to see some growth in the operating expenditures.

Okay, an how about for the whole year?

This seems to be a little bit more and more difficult to go on 20 nanometer.

Will R&D potentially increase over the next 12 months?

It will be difficult to comment on the longer-term trend, but at least for the near-term, foreseeable future we will try to control our R&D budget within a certain range.

Great, thank you.

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

Yes, just one clarification for your 28-nanometer low power.

Does it still use a metal gate?

Low power -- most of the low -- they have different versions of low power.

Most of the low power are Poly SiON, but certain customers do choose a different version of high-K/metal gate, but there are so many.

But majority are Poly SiON.

Okay, is -- so the difference of a recipe is more on the high-K/metal gate, but in the low-power Poly SiON there seems to be fewer recipes.

Is that correct?

Not really.

Even Poly SiON they have so many varieties, yes.

Okay, got it.

Got it.

Thank you.

Yes, sure.

Your next question comes from the line of C.J.

Muse of Barclays.

Yes, good evening.

Thank you for taking my question.

I guess another question on 28 nanometer.

Considering the yields there are fairly similar to 40 nanometer on Poly SiON, I'm curious why the industry is seeing shortage at 28.

Is it that customers are skipping 40 and going right to 28 initially, using Poly Si, or is there some transition going on on the end-demand side, particularly for handsets, that's causing this shift?

Any color -- thoughts from your end would be very much appreciated.

First of all, Poly SiON at 28 doesn't mean the yield is as good as Poly SiON at 40; the shrinkage and the different challenges and the requirements.

They are different, first of all.

As far as the shortage, I really cannot make much comment at this moment.

It's -- at least UMC doesn't really have that issue at this moment.

Okay, thank you.

Thank you.

Your next question comes from the line of Satya Kumar of Credit Suisse.

Yes, hi, thanks for taking my question.

I was wondering if you could give a breakdown of the CapEx mix in 2012 between, I think, upgrading your old 65 nanometer and adding new capacity at 28 and investments on 20 nanometer?

And how should we think about the mix as we look into next year?

Yes, for our CapEx I think over 20% of our CapEx are for capacity conversion.

That's the rule of thumb.

The other separations are -- we spend 97% at 12-inch capacity, 3% for 8-inch upgrades.

And how about -- on the capacity between -- CapEx between 28 and 20, two zero?

20 are R&D expenses.

They are around 6% or 7%, I guess, of our CapEx.

All right, and just a quick follow up.

I think to an earlier question you said that the double patterning is on all metal layers and you mentioned a few things.

Would you be able to quantify how many layers that is?

And I just wanted to confirm that that double patterning is on 20 nanometer, two zero nanometer, and not 28.

It's only for two zero nanometer.

28 is no double pattern.

(Multiple speakers).

Yes, how many layers is this?

Every customer has different metal layers, so it depends, yes.

Maybe from five to 12, six to 12 layers.

It varies, yes.

Six to 12 layers of metal, or six to 12 layers of double patterning?

Six to -- it depends on customer's application.

Maybe some customer uses six layers metal only, some use 12 layers of metal.

It's just examples, yes.

All right.

Okay, thank you.

Thank you.

I would now like to turn the call back over to management for closing remarks.

Thank you for joining us today and thank you again for your interest.

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

Operator, back to you for the closing remark.

Thank you for your participation in UMC's conference.

There will be a webcast replay within an hour.

Please visit our www.umc.com, under the Investor Relations, Investor Events section.

You may now disconnect.

Goodbye.