聯華電子 (UMC) 2012 Q3 法說會逐字稿

Welcome, everyone, to UMC's 2012 Q3 earnings conference call.

All lines have been put 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 at www.umc.com under the Investor Relations, Investor Events section.

I would like to introduce Mr. Bowen Huang, Head of Investor Relations at UMC.

Mr. Huang, you may begin.

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

With me today is the CEO of UMC, Dr. Shiwei 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 Company's control.

For these risks, please refer to UMC's filing with the SEC in the US and the ROC Security Authorities.

I would now like to introduce UMC CFO Mr. Chitung Liu, to explain UMC third-quarter -- third quarter 2012 business results.

Thank you, Bowen.

For the third quarter of 2012, revenue was TWD28.53b, a 3.3% quarter-over-quarter increase from TWD27.62b in 2Q '12 and a 13.3% year-over-year increase from TWD25.19b in 3Q 2011.

Gross margin was 24%.

Operating margin was 12.7%.

Net income was TWD2.42b and earnings per ordinary share were TWD0.19.

The above is a short summary of UMC's results for third quarter 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 Q3 2012, both UMC's revenue and operating profit continued to grow.

Wafer shipments reached 1.13m 8-inch equivalent wafers, with overall capacity utilization at 84%.

Increase of 40-nanometer revenue contribution led to higher average selling price, which contributed to Q3 revenue growth.

With the share of 40-nanometer sales growing from 9% to 13% quarter over quarter due to solid 40-nanometer chip demand, we anticipate our 15% year-end internal revenue target from 40 nanometer to be achieved ahead of schedule.

In order to -- in addition to 40 nanometer, we are providing our customers with the most competitive and innovative embedded Flash specialty technologies for the rising touch sensor chipset market.

This platform has been successfully adopted by numerous industry-leading customers, with many products currently in mass production.

We are optimistic that these specialty technologies will inject new growth momentum in the coming future.

28-nanometer progress is within our expectation.

We see an enhancement of the design-in products continuing to improve.

For first-wave 28-nanometer product matching business, we are seeing evident yield progression for ported ICs after adjusting our process and device parameters during recent months.

UMC also successfully taped out a mobile communication product in Q3, using our 28-nanometer gate-last high-K/metal-gate process.

We are subsequently collaborating closely with customers for their 28-nanometer mobile communication and computing, wired and wireless connectivity, digital TV, data storage controller and programmable logic products.

Meanwhile, based on our IBM FinFET licensing, UMC has decided to aggressively develop 40-nanometer FinFET technology with 20-nanometer metal back-end [light].

40-nanometer FinFET will deliver the most optimal low-power and high-performance solution to offset the cost impact from using double-patterning lithography.

Foundry is prone to both inventory correction and the industry cycles.

We expect the present inventory adjustments to continue into early next year.

The momentum of the demand recovery in 2013 will be determined by macroeconomic conditions, end demand strength and the transition progress for new products entering the markets.

In the meantime, UMC will continue to enhance the customer composition and product mix and further exercise flexible capacity deployment to accommodate evolving production requirements.

UMC is also strengthening its tailored cooperation with leading-edge and specialty technology customers for specific products and applications, to provide a full range of our customer-driven foundry solutions.

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

Wafer shipments will decrease by approximately 7% to 9%.

Wafer ASP in US dollars will increase by approximately 2%.

There will also be approximately 1% revenue impact on NT dollar appreciation.

Gross margin will be in high teen percentage points.

Capacity utilization will be in mid to high 70% range.

The communication segment will outpace consumer and computer segments in Q4.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thanks.

(Operator Instructions).

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

Please ask your question.

Yes.

Thank you.

Good evening.

I wanted to follow up on a topic from the afternoon conference.

I think you mentioned the own UMC process on poly/SiON and high-K were broadly on track.

More of the challenges were on porting of designs for 28.

Could you maybe talk about the experience you're having on the porting, if this second source model or porting model or TSMC-like process, if you can continue to do that type of model, you can do nodes, like 28 and 20, or it'll increasingly rely on a UMC-specific process?

Yes.

As I mentioned in the afternoon, porting business definitely has more challenge because we need to match into the regional fabs' parameter targets.

But on the other hand, UMC has been doing this kind of service as part of our business for quite a few nodes.

So you are definitely right.

Moving to the new generation beyond 28, all the customers are adjusting their methodologies for multi-sourcing.

So it's not just -- you cannot just throw a GDS tape to us and we can just provide a service.

It requires more collaboration from the design and from a design and characterization perspective.

Okay.

And I wanted to ask a follow-up on more of a move.

You probably can cover your CapEx with operating cash flow or come pretty close to it.

But I'm wondering your thought process, if you were to move to a model similar to Vanguard, where they have the 8-inch model, more depreciated fabs, low CapEx, if that's a model you'd consider.

Or if you think on 12-inch it might be tough given your fab network to replicate that type of model, or be strong cash flow, maybe less CapEx.

Or do you think still the push on 28 and 20 is still feasible to generate cash flow?

Yes.

So we can definitely stop investment and enjoy a few years very good return.

But for 12-inch, we need to move on.

Even today our 8-inch, for example, the loading is actually below 12 inches average loading at this moment.

So on the other hand, our operating cash flow, including depreciation and profit, is pretty much -- can cover our CapEx.

And in the long run, as I mentioned in the afternoon, with the commonality of equipment from 40 to -- even to FinFET to some extent, we are pretty much okay on a self-sustainability point of angle.

Okay.

Thank you.

And just -- okay.

And I wanted to just ask a couple of housekeeping.

The -- if you could talk about outlook for non-operating, if there's any year-end write-downs we should note into fourth quarter or follow on.

And then if you could clarify the tax, the one-time tax charge you took and then effective tax rate to use going forward.

For the Q4 non-op, we will still encounter some loss associated with the closure of our UMC Japan operation.

But the loss should be less than that compared to third quarter.

And again, UMC, we will try to divest some of our non-core assets if necessary to offset the impact.

But we don't have a number as a target for Q4.

All we can say is we will minimize the negative impact on the closure of UMC Japan.

As for the tax rate, this is a one-off event in third quarter.

The Taiwan government, because the implementation of capital gain tax, the minimum tax for tech companies, the tax rate was raised to 12% from originally 10%.

And with our tax credit, our recognized tax credit, we have to give 2% back at once.

And that's where the TWD600m-plus incremental tax comes from in the third quarter.

And going forward we expect the effective tax rate to be near 12% range in the near future.

Okay.

Thanks so much.

Thanks.

Thank you very much.

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

Please ask your question.

Great.

Thank you.

Just two quick questions.

First one is you had some very strong growth in your 40 nanometer and below, yet you're guiding, I guess, the fourth quarter down sequentially.

I'm just curious, that particular node, 40 nanometer and below, will that still grow into the fourth quarter?

Is that something that you just see as sequentially continuing?

And then the same question on 28 nanometer and where do you think that might be, let's say, by mid next year?

So the leading node will continue to grow, especially our 40 nanometer.

For 28 nanometer, UMC has three types of business.

The first type of business is our design-in business, using UMC's own platform.

So for that the year in progress has been well on track.

The second part is high-K/metal-gate, with gate-last option.

So for UMC's high-K/metal-gate, we just taped out the first gate-last high-K/metal-gate communication -- notebook communication product in Q3.

So that's on track also.

The third part is the porting business.

So the porting business is much tougher.

Our first wafer of 28-nanometer porting business, we take this from a customer search and request, we did our best to support them.

Because of the urgency and the time constraints we did not go through the rigorous porting procedures we used to use.

So we have to do the process and device matching at the product level, which is very challenging.

However, through past few months, very aggressive parametric matching efforts, the year's progress has been quite encouraging.

In the meantime that will open up the window and door for many future porting customers in the future.

So also from our -- going back to our first major design-in customer, their product introduction, production ramp, that got pushed out to next year but it's not lost.

High-K, we have continued R&D effort and ramp work towards the beginning of 2014, so that allows a sufficient time to ramp it up step by step with our procedures.

So that's pretty much where we are today.

Okay.

So just to clarify, I understand the percentage mix will certainly increase for 40 nanometer and below, but the absolute dollar levels will still grow in the fourth quarter.

Do I understand that correctly?

I think so.

40 nanometer, yes, definitely would.

Yes.

Dollar value, both nodes will continue to grow also.

Excellent.

Thank you.

And just a housekeeping question, you obviously had some pretty good controls on your OpEx.

I think bonus accruals and I think you mentioned something about lower mask cost as you ramped up some of your designs.

Is this a new normalized run rate?

Can you talk a little bit about your operating expense plans for the next couple of quarters?

I think between TWD3.3b, TWD3.5b is probably the normal run rate in the near future.

Okay.

Thank you.

Thank you.

Thank you very much.

The next question comes from the line of Daniel Heyler from Bank of America-Merrill Lynch.

Please ask your question.

Hi.

Yes.

Good evening, Dr. Sun as well as Chitung.

I want to ask a few questions.

With regard to the 40 nanometer, in the afternoon session you commented on most of your new capacity wants to focus on 28.

I'd like to understand why that is.

There still seems to be quite a bit of good demand for 40 nanometer and probably even market share opportunities in 40 nanometer.

So I'm wondering why you're not adding more 40 nanometer in the next one or two quarters.

So for the capacity deployment, our approach is to focus on 28-nanometer equipment.

However, they are all real-time convertible to 40-nanometer business, in other words, we treat them together as the same capacity.

This gives us excellent flexibility when we bring up a new technology node at 28 nanometer.

So in other words, we are allocating sufficient 28-nanometer production run rate to bring our porting product business for both the yield and the margin back to the design business level.

In the meantime, we have keep up a good loading balance from our 40-nanometer business.

So actually they are together.

For the two nodes, the equipment commonality I think is probably over 90%.

90% commonality, okay.

So I'm wondering if you're anticipating the 40-nanometer business to continue to grow the next -- in fact probably even the next four quarters.

Could you see the dollar value of 40 nanometer keep rising, again over the next three to four quarters, or do you think it's going to shortly peak out?

You're near end of life in terms of customer ramps.

Well, I think 40 nanometer, I cannot forecast three or four quarters, but foreseeable future it will grow.

And we're just starting actually.

There are many customers who have over, I don't know, maybe 110 tape-outs.

They will grow.

Right.

Okay.

So visibility there in 40 nanometers is still very, very strong.

Yes, yes.

Okay.

And then on -- I guess on the 20-nanometer fab conversion, I'm wondering, next year, how much actually wafer capacity do you guys think you need?

I guess if you assume the general consensus of a 10% growth for foundry next year, under that scenario, could you concentrate more of your CapEx on, as you said earlier, more on fab upgrades or do you need to add a lot of new wafer capacity to meet that kind of growth?

We will continue to add wafer capacity.

But the CapEx, a certain portion is for conversion.

We are now approximately 20% -- over 20% CapEx now for conversion.

But again it's a milestone treatment, so we don't have a concrete plan at this stage.

Sure.

Understood.

So for -- you only said 20%.

Is that thinking about -- is that thinking about next year or are you talking about this year?

In general.

In general.

We continue, for example, to -- we have been always doing, for example, upgrading 90 to 65.

And 65 is still in high demand, also with lots of specialty technology requirements.

So at certain time we'll converge certainly 65 to 40.

And so it's ongoing kind of trying to -- it's a complicated equation.

Sure.

Yes, every node's a little bit different depending on the toolset.

So I'm just wondering on the 28 question whether a lot of that is more convertible than, say, the 65 node.

Do you mean between 40 and 28?

Yes.

There's more commonality between 40 and --.

Yes, yes.

They are all immersion.

For example, they are -- on 40 they are all immersion.

When we buy new immersion tool, we buy the latest so they can be used for 28, and also can go back to work on 40.

Okay.

So you have quite a bit of flexibility next year if your yields don't come through for the 40 business.

Yes.

Yes, that's the point.

So when we bring up a new node, we want the flexibility, so we buy 28 tools.

If the year, the margin is not on par yet, then we just do more 40.

Okay.

Great.

I was wondering if also, Chitung, could you give us an update on your -- just to confirm your depreciation for early -- preliminary number for 2013, if that's changed from your prior expectations.

Yes.

This year the depreciation should be growing at around 9% or -- 9% compared to that of last year.

And next year we are looking for continued growth, but the percentage of increase should be less than 9%.

Right.

And what's the fourth-quarter number, Chitung, for depreciation and cost of goods sold?

The Q4 numbers should be marginally higher than that of Q3.

Yes.

Below 1% then.

I think low single digit, 1% or 2%.

Okay.

Thank you.

And then do you have initial -- because of the number of projects, you're working quite a few things next year, could you give us any sense of your R&D budget for next year?

What kind of number are you thinking for next year, absolute dollars if you have that?

We don't have absolute dollar, but we are keeping -- we plan to keep up a similar R&D-to-revenue ratio, around 8% now, depend on the -- below 10% for sure.

Okay.

So you're going to stay basically the current third -- third- and fourth-quarter run rate, you think that's sustainable.

Yes.

Okay.

Great.

And then finally on -- 20 nanometer is clearly an area where there's been a lot of concerns of high prices and fairly concentrated supplier base.

So I'm wondering if your collaboration with your customers has intensified recently or if anything has changed in the industry, and your level of confidence that you can actually deliver 20 nanometer by the middle -- in high volume by the middle of next year in high volume.

And if you could, that would be great if you could give us some color on your level of confidence in executing.

Thank you.

Well for 28 nanometer, definitely we have many engagements in quite a broad spectrum of customers.

For example, high-K/metal-gate, we are the only other foundry offering the gate-last high-K/metal-gate.

And every customer, larger or small, they definitely need their market sourcing.

And also we are really trying to strengthen our design-in business because down below -- beyond 28 nanometer naturally will be very -- [blind matching] will be very difficult.

So also customers are refining their market sourcing methodology from design and characterization perspectives.

So 28 nanometer, our spirit is very high, with very firm commitment.

It's a long-lasting node.

And every bit of effort we invest today will bring us a good return for many, many years to come.

So we will be there.

Beyond that, I mentioned in the afternoon, we are focusing on the FinFET development on top of IBM licensing during the middle of this year.

So after 28, FinFET will be our focus.

So also we put together a dedicated R&D team in Tainan Science Park to focus on FinFET development.

Okay.

Thank you very much.

I appreciate your time.

Thank you.

Thank you very much.

The next question comes from the line of Szeho Ng from BNP Paribas.

Please ask your question.

Hi.

Good evening, gentlemen.

Just want to know if you can still get more capacity at UMCi because it has been running at around 45,000-wafers-per-month capacity for a few quarters already.

It's pretty much full.

Okay.

So it's hard to do any debottleneck?

Szeho, you're breaking up so you can say that again, please?

Yes.

You cannot add more capacity, even through debottlenecking?

For the current phase one/phase two in Singapore fab is pretty much full.

But we can still do -- recently we had a 40-nanometer pilot line there in preparation for future conversion of 90 and 65 to 40-nanometer specialty technologies.

By the way, to advise, UMC's center of excellence for 12-inch specialty technologies, we're adding embedded high-voltage, CMOS image sensor, [backside illumination], embedded Flash, everything to there.

On the other hand, we do have the lab next to the current fab phase one/phase two, so we can actually duplicate that current structure into phase three for double the capacity.

But first we are working on our phase five and six in Tainan, so that's probably in Taiwan first.

Okay.

Got you.

And then the other question with regard to He Jian could you remind us what the percentage holding there right now.

By now it's 35% and we are applying to the Taiwan government to increase our holding to 86%.

Hopefully it will be approved by the end of this year.

By the end of this year?

Yes.

Okay.

I see.

But I believe He Jian right now is profitable, right?

Yes.

And we --.

Okay.

Thanks very much.

Yes.

We have recognized investment income of 35% basis for the first three quarters of the year.

Sure.

Okay.

All right.

Thank you very much.

That's useful.

Thank you.

Thank you very much.

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

Please ask your question.

Hi, Dr. Sun, Chitung, good evening.

My first question is on CapEx in 2003.

Can you give us some kind of guidance or direction?

Should that be a certain percent of sales or, like Dr. Sun just commented, should that be consistent with your operating cash flow?

Thank you.

Our 2013 budget is being finalized at this stage, which includes the final number for CapEx as well.

So will give a guidance on 2013 CapEx next quarter.

As for the guidance, for the ballpark figures, I guess we always wanted to support our CapEx through internally generated cash or our free cash flow.

So that's probably the best indicator I can give to you right now.

Okay.

Great.

And my second question is previously, like in every Q3, you recognize cash dividend as an investment income from your subsidiaries.

And this year from the management report I do not see really that line.

Does that mean in the future that line will be pretty minimal?

For the non-op line in the third quarter, it's a little bit more complicated this year.

We still receive about TWD800m from cash dividend invested this quarter.

However, we also announced liquidation of our Japanese operation.

And at the first stage we recognize about TWD1.05b liquidation loss from Japan.

In the meantime, our solar investment, such as NexPower, also has an impairment loss.

And total, along with the operating loss, we recognize about TWD800m as well.

So those kind of even out, on top of that we've sold some of our holdings in Novatek, with a gain of TWD1.5b.

So the net result for third quarter was TWD83m.

Okay.

So going forward we should model around TWD100m cash dividend in third quarter by, say, next year, year after, ballpark figure?

Well, TWD800m this year.

TWD800m?

Yes.

And depends on disposal pace and also the payout ratio from all the investees.

Sure.

Sure.

Got it.

And related question is on cash flow statement.

On the financing investment, I do not see the disposal-related cash flow.

Is there a reason for that or --?

No, it should be in there, but it could be a previous statement.

So I think if you look at the footnote, it should be there.

Okay.

Great.

My next question is on the -- your major customers, the first customer getting pushed out.

I think this customer also announced it's going to potentially dispose its wireless business.

Would that be affecting the future, let's say, CapEx next year or the 28-nanometer activity to revenue growth.

Donald, I cannot make any comment on even insight basis on any specific customer.

Sure.

That's fair enough.

So my final question is on the gross profit margin in Q4.

Is there -- does the 28-nanometer ramp-up have any negative impact on the margins in terms of like the ramp-up of the fab, etc., or is that still going -- potentially happening in Q1 next year?

Well, for third quarter and to some extent fourth quarter, yes, we are negatively impacted by the early ramp of our 28-nanometer business.

But the situation, as Dr. Sun mentioned, we have made significant progress on the yield and hopefully the situation can get improved in Q1 next year.

Okay.

So the impact will start to decrease potentially in Q1?

Well, along with the yield improvement, yes.

Sure.

Great.

Thank you.

Thank you.

Thank you very much.

The next question comes from the line of Daniel Heyler from Bank of America-Merrill Lynch.

Please ask your question.

Yes.

Thanks.

Just two quick follow-ups.

Chitung, I was wondering, you alluded to some non-core asset disposal possible possibly, I think, in the fourth quarter.

I want to know how much market value of non-core assets are still available to UMC at this point?

Well, it's dynamic.

It varies from quarter to quarter.

But our unrealized gains from the equity-method holdings is at least more than TWD10b.

Got it.

Okay.

Cool.

Thanks.

And then I think Dr. Sun alluded to the 200-millimeter fab utilization.

I think you said it's below the corporate average.

I'm wondering what are the prospects for increasing utilization on your 8-inch fabs.

Is this -- should we expect current utilization to be the normal level or is there any way that you can actually raise utilization?

If so, what specific products can we see in the next one or two quarters to raise 8-inch utilization?

Yes.

We definitely had very much renewed momentum and effort to diversify our 8-inch offering to many, many new specialty technologies because most of the past 8-inch business, even, for example, embedded high-voltage, some other things there are, many of them are migrating to 12-inch operations.

So in this quarter's press, we also gave an example, if I can use that as an example for you.

We developed a very special embedded Flash technology in 8 inch for large -- larger panel notebook, smartbook applications, for touch applications.

This embedded Flash has become very excellent to reduce the signal noise ratio for touch, larger-panel touch applications, so for our customers.

And we are having many -- our specialty technology development team in 8 inch are engaged with many, many new applications to -- for the future as they are -- some of their businesses are migrating to 12 inch.

Okay.

Those are some new initiatives.

Are there any opportunities for -- I just wondered, there's a lot of 8-inch capacity that's lodging around the industry, right?

So is there any opportunity to pick up IDM business or IDMs?

Any prospects for some fab shutdowns that could be transferred to UMC?

Or is most of your growth going to be dependent on, as you said, new development, new products?

Yes.

That's also happening.

We have one example.

It's also they are also doing lots of the embedded non-volatile embedded Flash microcontrollers.

Used to be very much IDM company.

They are trying to become very fab-light or fab-less company.

So we're picking up the majority of their business.

So there's so many things happening and we are trying our best.

Okay.

And I wanted to ask you about the LCD driver sector.

That seems to be an area of renewed growth as well.

I understand from Chitung, I believe, Chitung, you mentioned that there was some market share loss last quarter.

So if you could update us on their LCD driver market, whether you'd see meaningful growth there and market share opportunities.

For UMC, LCD driver, especially for the small panel LCD driver, we are probably the industry leader.

We have such a large share.

And because of the large share it's prone to market fluctuation.

And actually we try to focus more, adding more larger-panel driver IC business to balance it out.

So I think -- and also we are doing very well for the 12-inch 80 and 55 nanometer future driver IC business, for example, full HD, HD720 and lots of other new projects ongoing.

Okay.

But I think the small drivers are mostly 12-inch, right?

I'm just wondering --.

No, no, still 8 inch.

So the majority are 8 inch today.

For mobile phone smartphone drivers?

Yes, yes.

Only the very high end are moving to 12 inch now.

Not much.

Not much.

Okay.

Great.

Thanks.

That's it from me.

Appreciate it.

Thank you.

Thank you very much.

The question-and-answer session is now closed.

I will hand the conference back to the presenters.

Sir, please go ahead.

Thank you again for your interest in UMC.

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

Operator, back to you.

Thank you, sir.

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.