聯華電子 (UMC) 2012 Q4 法說會逐字稿

Welcome, everyone, to UMC's 2012 fourth-quarter earnings conference call.

(Operator Instructions).

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

Mr. Huang, please begin.

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

With me today is the CEO of UMC, Mr. Po Wen Yen, 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 securities authorities.

I'd now like to introduce UMC's CFO, Mr. Chitung Liu, to explain UMC's fourth-quarter 2012 business results.

Thank you, Bowen.

For the fourth quarter of 2012 revenue was TWD26.09b, an 8.5% quarter-over-quarter decrease from TWD28.53b in third quarter 2012 and a 6.8% year-over-year increase from TWD24.43b in 4Q '11.

Gross margin was 16.8%.

Operating margin was 3.7%.

Net income was TWD1.17b.

Earnings per ordinary share were TWD0.09.

In 2012, revenue for the full year was TWD106b, with TWD9.08b operating income and TWD7.92b in net income and TWD0.63 earnings per share.

Above is a short summary of UMC's results for 4Q 2012.

More details are available in the report which has been posted on our website.

I will now turn the call over to Mr. Yen.

Okay.

Thank you, Chitung.

Yes, good day, and happy Chinese New Year to our guests and friends in the investment community.

I'm here today to address you for my first quarterly conference call since becoming UMC's new CEO.

In the fourth quarter 2012, both UMC's revenue and gross profit were in line with our expectations.

Quarter-over-quarter revenue decline was primarily attributed to decreased wafer shipments.

A total of 1.07m 8-inch equivalent wafers were shipped, with overall capacity utilization at around 80%.

Due to the impact from declining wafer shipments and currency appreciation, gross margin for the quarter was 16.8%.

Revenue contribution from 40-nanometer continued its sequential increase to 15%, reaching our internal target.

The industry competition intensifies.

The bar has been raised with regard to customer expectations for leading-edge technology, [charters], time to market and foundry service feasibility.

As UMC's newly appointed CEO my first priority is to enhance R&D for advanced processes.

In order to realize maximum benefits from our R&D efforts, we will increase internal resources by leveraged outside collaboration so that we can effectively integrate our R&D with manufacturing to ensure timely delivery of those key engagement projects.

For example, UMC's FinFET development began in 2010 and was bolstered in 2012 through a core operating licensing agreement with IBM for their fundamental FinFET technology.

Our FinFET development team has since been making good progress.

Meanwhile, UMC recently demonstrated the world's first TSV, through-silicon enabled 3D IC chip stacking technology, developed under an open ecosystem collaboration.

The 3D IC, developed with an [outside] partner, reached a major milestone by passing technical level reliability assessment.

This successful collaboration reaffirms our strong commitment to elevating technology capabilities in order to fulfill the promise of providing high-value-added services to our customers.

UMC's operating result can be further enhanced through management team efforts to increase capacity, control the cost and expand our customer base.

Although UMC's 28-nanometer ramp has been slower than anticipated, we remain dedicated to advanced technology development and timely capacity deployment to serve our customers' needs.

Equally important is our customers, and we bring commitment to bringing their new and existing 28-nanometer products to fruition at UMC.

In the short term we continue to see elevated demand uncertainty from customers, along with supply chain inventory that will need additional time to digest.

When demand recovers, we are optimistic about the growth momentum from strong mobile communications segment.

2013 is a critical year for UMC to demonstrate continuous success.

In addition to acquiring He Jian Technology operation, which will help UMC expand in the China market and broaden the Company's operating scale, we will continue to invest appropriate CapEx to further our diverse process development and expand the leading-edge capacity.

These endeavors will help expedite the Company's growth and strengthen competitiveness to enhance UMC and its customers' overall value and increase shareholders' equity.

Now let me provide you with the guidance for the first quarter of 2013.

For the foundry segment, wafer shipment will be increased by approximately 6%.

For the foundry segment ASP in US dollars will decrease by approximately 6%.

For the foundry segment profitability, the operating margin will be approximately breakeven.

For the foundry segment capacity utilization, we'll be around 75%.

2013 foundry CapEx budget is about $1.5b.

Here are some other guidance to non-operating income and new business segment.

For the non-operating income after tax will be approximately $100m.

For the new business segment, revenue will be approximately TWD2b.

For the new business segment, the operating margin will be in loss of approximately TWD1b.

This concludes my comments.

Thank you for your attention and 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.

Good evening.

Thank you.

I wanted to ask the first question for Mr. Yen, just given you're coming in as CEO.

One of the priorities you mentioned was increasing the focus on the R&D.

Could you talk about how that translates?

Do you expect in terms of headcount or R&D expense any step up on the R&D side?

And if you were to go through just any other operational or strategy changes or you think it's for the most part ongoing operations as it was prior to your appointment.

Okay.

Yes.

Thank you, Randy.

Yes, for the -- your first question is about UMC's -- the increase of R&D resources.

And in terms of the headcount and resources, we are about to increase 15% and in terms of our R&D expense.

And yes, there are some -- there are two focuses we are now putting efforts on, R&D -- integrate our R&D and manufacturing sites and to improve the technology strength to production ramp-up cycle time.

The other focus is we are -- besides increasing our internal R&D resources, we're also leveraging external resources through consortia, partnerships and collaboration, which I was also explaining in this afternoon's conference.

However, it will take some time to show the results.

Okay.

And to clarify, the 15% R&D headcount increase, was that 2012 to 2013, that's what you're expecting for this year?

That will be this year.

Okay, for this year.

Okay.

And for Chitung, I think I wanted to clarify the guidance again or factor for it.

I think the underlying foundry business implies with the He Jian a flat sequential when you factor shipments and ASPs.

The margin, if you could walk through again the margin, where it's coming down from about 4% to breakeven, the factors for the sequential change in the margins?

Mostly coming from ASP which was result of relatively lower 12-inch utilization rate versus 8-inch.

And for the 28-nanometer ramping, the operating cost, the manufacturing cost is also higher than the other nodes.

So all together we've actually seen a decline in operating profit margin.

Okay.

And the other question I had, the $1.5b for CapEx, how much of that is pure 28 or 40 just capacity additions?

And how much capacity additions do you expect with that?

And how much would just be for technology adds or upgrades?

If you could give a little more color on what -- how you plan to split out the spending.

For the CapEx breakdown, we provide the numbers, which is 6% for 8-inch and roughly 94% for 12-inch.

And for the 94%, about 11% is R&D-related.

So the remaining 83% is mainly for 12-inch, although we are also building the shell of the third 12-inch wafer fab in Thailand, the phase 5 and phase 6. That will also take some of the CapEx.

So that's the rough figures for 12-inch capacity for 2013.

And majority is for 12-inch -- 28-nanometer related.

Okay.

For the 8-inch fab, the He Jian fab, what's the maximum output?

And what are the restrictions in terms of Taiwan regulation, like what you can actually do in China for manufacturing?

Monthly capacity is 45,000 8-inch wafers.

And they can do up to 0.13 or N minus 2. N represents UMC's most leading mainstream technology.

Okay.

Thank you.

Thank you.

Thank you very much.

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

Please ask your question.

Hi.

Good evening, gentlemen.

For the new business segment, what will be the revenue level required to achieve operating breakeven?

It's not so much about scale itself; it's rather the pricing and cost.

So right now our new business, it's mostly in the solar industry, is suffering from very weak pricing.

So it's -- it takes the price to rebound to make the new business to be operating profitable.

So scale-wise may not be able to help on the profitability of the new business.

Okay.

I see.

And second question, roughly what percentage of the foundry revenue is related to smartphone or tablet?

About 30%.

30, right?

Yes.

Okay.

All right.

Thank you very much.

Thank you very much.

The next question comes from the line of Jeffrey Toder from RBS.

Please ask your question.

Hi.

Two questions actually.

First on the -- I guess on the new businesses.

How do we think about that as going forward?

If solar prices don't rebound, should we assume that the revenue and operating contributions are the same?

Or is there another way we should look at it?

Well, it's a very volatile industry so it's a bit difficult to forecast beyond this quarter.

However, as we mentioned, we probably won't put further capital into the new business for the sake of capacity expansion.

We will continue to inject capital for the efficiency improvement of the business continuity.

So revenue-wise, without the pricing rebound, I would say it's pretty much at the current level.

However, we do hope through the efficiency improvement the net income level or net loss, if you will, hopefully we will see further improvement throughout the rest of the year.

Okay.

So we should assume stable capacity going forward.

Do you have some guidance as to what that capacity number might be?

Well, I think the revenue line, at least for the current quarter, will stay around TWD2b or so.

I think that's a ballpark figure for the near term.

Okay.

And then just one more question on this.

So you mentioned that prices need to go up in order to each an operating breakeven.

Can you give some indication of how much prices would need to rise to reach that level?

I think we have two major operations, one in the thin film, one in the poly.

The poly arm is doing slightly better.

I think they are reaching cash breakeven and moving to the cost breakeven.

But the thin film still a short gap to cash breakeven.

So the thin film part we will see.

We will need more effort to bring the operation into profitable operation.

But the poly part looks like the opportunity is much better.

Okay.

And then on the non-operating income after tax, you're looking at $100m or over $100m.

That's a pretty big number considering where your operating line is going to be.

Can you explain where that's coming from?

That $100m after tax is mainly coming from the accounting treatments of the [bargain] purchase gains.

So if you recall, we settled additional 51% of He Jian shares on January 30 -- January 31 this year.

And we now control 86% of He Jian.

And since we make -- we become controlling party of that entity and we also only pay 55% of the book value of He Jian, so under IFRS, the new accounting treatment, we have to realize the gain at once, which is the $100m-plus after-tax profit coming from.

Okay.

So that's obviously a non-cash item then?

It's a non-cash item.

Okay.

And then can I ask one more question or do you want me to come back?

No, please, yes, please.

So I think in the meeting this afternoon it was a little bit disappointing, the progress that the Company has achieved so far with 28 nanometer.

And it sounded like the whole process is delayed by about a year so that UMC will be ramping up 28 nanometer around the same time TSMC will be ramping up 20 nanometer.

So that's actually an unusually large gap, if you look at UMC's progress over the last 10 years or so.

Can you explain why 28 nanometer has been so difficult, and what the strategy might be to regain more competitiveness in advanced technologies going forward?

Yes, I think our 28 nanometers, our current status, our yield, there's room for us to improve this, yes.

Generally speaking, the -- our 28 nanometer technology, we have four drivers, which is according to our communication to our customers.

We align our milestones our customers.

So basically we are still following this milestone.

I guess the question is last year in the second half, management and a different CEO, I understand that, management seemed confident that the Company would reach a 5% contribution from 28 nanometer by the end of fourth quarter.

And now that seems to have stretched out a year later.

I understand that yields have been low.

But I guess the question is why was this node particularly difficult?

And if you're starting your 28 nanometer when Leading Edge is moving to 20 nanometer, and then 14 FinFET follows within four quarters after that, it sounds like it's going to be an increasingly competitive environment going forward.

And I guess Mr. Yen, as the new CEO, you are entering in a very challenging time.

How -- what's your strategy for addressing, I guess, a more difficult market than it might have been five years ago?

Yes, I think the -- to comment on your first question is really facing our yield is in the low -- concerning to the benchmark company, and is a certain gap, yes.

And so that's why we've become a low priority among the suppliers to the first engagement customer.

And however we are -- we still have many engagement.

As I mentioned that we have [four 28] nanometer processes which have -- some of them are defining UMC's process.

And so they are -- those are milestones, they are on the track with our alignment with our customers.

So nearly on the second half of this year we can have those processes with also the product qualification and start a ramp-up in Q4 this year.

So that is -- and regarding the strategy, in order to deliver our 28 nanometer technology on time, so we increase our R&D staff and also the putting some of high terminal gate technologies capacity effect.

And this can secure -- to accelerate our R&D cycle time.

So that's mainly our current focus, to catch up the technology gap with the benchmark company.

And if you're starting to ramp up 28 nanometer, as you said, in fourth quarter, and I think you mentioned something like low single-digit contribution, when do you expect 20 nanometer to be available for customers?

And when do you think you'll see ramp-up of 20 nanometer?

Yes.

I would say -- yes, that would be a first step of next year, 2014.

2014, yes.

It'll be ready for tape out, or it will be ready for commercial production?

Commercial production.

So we could see commercial production of 20 nanometer in the first half of '14?

I'm sorry.

You're talking about 20 nanometers?

Okay.

20 nanometers, yes.

20 nanometers is -- we're still communicating with -- intensively with our customers and -- I think not every customers request this 20 nanometer technology.

So we will get our process developed in our pipeline but however -- yes.

Do you think a lot of customers may skip?

I think you mentioned that really 20 nanometer is popular with AP producers.

And those will be the initial adopters from an industry perspective.

Do you think a lot of other customers might skip 20 nanometers and move to 14 FinFET or 16 -- whatever, it's got a bunch of different names, will move directly to FinFET and skip the 20 nanometer node?

Yes.

For the only -- only the time to market products of lead customers, lead companies are just to my knowledge will adapt 20 nanometer [trainer] device for their time to market product.

And there are more companies, more our customers, they are considering to, because of the persistent cost and performance again is not that [worthy] to go through this technology.

So some customers they consider to skip the (technical difficulty) to 14 nanometer FinFET technology.

So we are focusing on deliver our FinFET technology in the second half of 2014, next year.

So that is our current focus, yes.

Okay.

So if I were just to sum up the strategy, you're -- because of yield issues, you're entering 28 nanometer slower than you had originally anticipated.

It sounds like 20 nanometers for UMC is going to be fairly small, and you're going to try to move customers pretty quickly into FinFET and then catch up with the industry, or get closer to the industry with FinFET.

Is that a reasonable summation of the overall strategy?

Yes.

That's correct.

Okay, great.

Thank you very much.

Thank you very much.

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

Please ask your question.

Great, couple of questions.

First, there's a lot of moving parts here, on the top line as well as with your margins.

Let's first start with the consolidating He Jian.

I understand your guidance with He Jian is for shipments up 6%, revenues down about the same -- pardon me, ASP is down about the same.

Without He Jian shipments flattish, ASP is just down a little bit, I guess.

So I guess I'm trying to understand is, even the incremental revenue in the first quarter that you're getting from He Jian and how that impacts?

I guess I'm trying to understand the 45,000 wafer (inaudible) fab.

How much is contributing, what kind of yield rate it's running?

Then ultimately that's going to lead me to questions about the margins in adding and consolidating this business.

So can we talk a little bit about how much revenue it adds in the first quarter to UMC?

For He Jian we only count two out of the three months in first quarter; we made the purchase at the end of January.

So only two-thirds of Q1 He Jian numbers come into UMC's consolidated numbers.

And He Jian in Q1 is pretty much breakeven as well.

So not so much help on our profitability.

Only the top line.

I'm still trying -- I understand it's two-thirds of a quarter, but can you help me understand the revenue, incremental revenue that's coming off there, and so then I get a good idea of the run rate as we go into 2Q as well when we have a full quarter?

We don't have the breakdown balance (technical difficulty) but you do have the capacity.

We provide it in our capacity breakdown which is represented by 8N is He Jian.

Right, is the utilization rate on that fab similar to the corporate average of 75% in the first quarter?

That's right.

It is, okay.

And then same kind of question, I guess, maybe just a little bit more of a consolidated balance sheet as well.

So can we talk a little bit about that consolidation, the implications for some of the assets and equity there?

Relatively speaking it's probably 15% addition to UMC's overall asset base.

So used to be the non -- it used to be non-core item but now moving up to the operating item.

So balance sheet wise, it doesn't really change much.

You still need to subtract the minority shares at the very bottom of your income statement.

So it's just moving from a standalone financial statement to a consolidated financial statement.

Everything else actually doesn't change much.

Okay.

And then maybe just a little bit longer-term question.

I'm trying to also reconcile consolidating more trailing-edge fab with wanting to invest more in R&D for 28 nanometer and 20 nanometer as well.

So I guess I'm really trying to figure out what UMC's now -- their margin model looks like.

So is R&D still an 8% to 9% of revenue number?

Maybe I can ask even in a better way.

Yes, UMC's going to be back above 30b per quarter run rate.

What kind of margins would you expect, what kind of R&D would be expected on that kind of quarterly revenue number?

We have just mentioned it's beefing up our R&D resources by increasing another 15% personnel in the R&D department.

However, that's not going to cost much from our cost structure point of view.

We're probably talking about moving from 8% to 9% to now maybe 9% to 10%.

So overall, that's our current focus.

And your second question --

And then on the gross margin level, if you do consolidate a fab that's now running breakeven, if you do get UMC back over TWD30b run rate over the next quarter two, what kind of gross margin we can expect?

Our guidance is still trying to focus on foundry only.

So if we talk about foundry only, going back to TWD30b run rate, then there's no reason why we cannot go back to the previous average of profit margin, say 30% to 35%.

But with addition of the new business, which tend to be lower margin, that's the part we are having difficulty to predict on a long-term basis; it's a very volatile industry.

Yes.

We're all having difficulty predicting that.

Okay.

And then one last just quick one, clarifying, in your guidance you talk about non-operating income having this $100m gain.

But then you also talk about the new business segment having an operating loss TWD1b.

I just want to make sure that when you say non-operating income after tax to be $100m gain does not include the new business loss?

The new business loss now is operating level.

So that will impact our operating profit from consolidated financial statement.

But the non-op up, the bargain purchase gains from He Jian acquisition it will be on the non-operating item.

I'm sorry, so the way it's written here it looks like it comes under the section of non-operating income.

So the new business segment actually does add TWD2b of revenue to your reported top line but takes away about TWD1b in operating profit in the first quarter?

Okay, thank you.

Sorry for all the housekeeping questions.

Thank you.

No problem.

Thank you very much.

Our next question comes from the line of Don --Donald from Goldman Sachs.

Please ask your question.

Good evening.

My first question is on the gross margin.

Chitung, can you give us an idea about the gross margin for the Foundry business in Q1?

And also maybe, I know the new business is hard to predict.

But just in general, for our modeling purpose, what your assumptions for Q1 on the gross margin lines?

Well, the Foundry-only segment, our guidance is operating -- approximately operating breakeven, on the operating level.

And operating expenses, it's actually no different from the previous quarter.

So we can do a quick calculation.

Okay.

Okay.

So Foundry OpEx would be similar to Q4?

Foundry segment, yes.

And for the new business, is the gross margin, let's say, is positive or negative?

New business, I will say gross margin is probably negative for Q1.

Thank you.

Okay.

Okay.

And we -- for the new business, previously you included that in the non-op --

That's correct.

Gain or loss.

So basically we should take that part?

Exactly, the net income doesn't really change.

Okay, got it.

And for the He Jian, I don't see the press release that you acquired recently controlled up to 86% of He Jian.

Can you give us an idea how much you paid for that?

And you said you paid for 0.55 -- 50% of book value?

We paid 55% of the book value.

And we actually had two tranche of the transaction.

The first tranche was 30% -- 20% plus 15% free shares.

And the second tranche, which happened on the -- at the end of January, was 51%.

So, overall we've paid $233m for the 86%, including 15% free shares.

Okay.

So how much you paid, I'm sorry, the US dollars?

$233m.

$233m.

Okay, got it.

Yes, and also, this is for Mr. Yen.

Regarding the FinFET, UMC has recently licensed IBM technology.

And do you think -- will that technology work, based on what you get from IBM, I assume you already got the tape or library, whatever.

Was that worth the money?

Because I think historically IBM -- UMC has licensed other technologies from IBM, it really hasn't worked well in the production.

Do you -- are you really confident it will work now?

Or is something that you might have to find a Plan B?

I think the -- we actually after licensing from IBM's FinFET technology platform, we actually made some progress recently.

At least in our [transistor] level we already have that kind of progress.

And I would say this time the IBM alliance, FinFET technology was much mature than the 130 nanometer technology node.

So I'm more confident on these licensed collaborations on the FinFET technologies.

I see.

The reason I'm saying it, it's like -- it looks like TSMC has its own technology and now Samsung, Global Foundry are going to IBM technology.

And just in case this IBM thing doesn't really work, why don't UMC really take another approach, license it maybe from TSMC or something else, then maybe you'll be ahead of Global Foundries and Samsung?

Would that be something to consider?

We're open to any scenario as long as it's good for our Company's competitiveness.

But this hypothetical question is a bit difficult for us to provide you with a view.

So (multiple speakers) we already paid for IBM's FinFET.

And certainly if any additional enhancement that UMC can acquire we would love to consider.

$233m.

Okay, right.

And --

Sorry.

We also assess our FinFET technology carefully with our customers.

And there is some input from our customers, so that -- so we are more confident on this FinFET technology platform IBM alliance, yes.

Okay, got it.

And Chitung, can you give us the depreciation for this year?

This year, because of the IFRS is a little bit complicated.

Apple to apple for UMC alone, we are talking about less than 10% increase.

But if we're talking about the consolidated depreciation versus 2012, UMC alone depreciation, we are talking about 15% increase.

Okay, got it.

Thanks.

Technology.

Thank you.

Thank you.

Thank you very much.

That does conclude the Q&A session for today.

I will hand the conference back to the presenters.

Thank you again for your interest in UMC.

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

Operator, back to you.

Thank you very much.

Ladies and gentlemen, thank you for your participation in UMC's conference.

There will be a webcast to be played within an hour.

Please visit www.umc.com under the Investors Relations, Investor Invest section.

You may now disconnect.

Good bye.