聯華電子 (UMC) 2013 Q1 法說會逐字稿

Welcome, everyone, to UMC's 2013, 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.

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 a 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. Bowen Huang, Head of Investor Relations at UMC.

Mr. Huang, you may begin.

Thank you and welcome to UMC's conference call for the first quarter of 2013.

With me today is the CEO of UMC, Dr. Po Wen Yen and the CFO, Mr. Chitung Liu.

During this conference we will 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 filing with the SEC in the US and the ROC securities authorities.

I would now like to introduce UMC's CFO, Mr. Chitung Liu to explain UMC's second quarter 2012 business results.

Thank you Bowen.

For the first quarter of 2013 revenue was TWD27.78b with gross margin at 15.2% and operating margin at 1.1%.

The net income attributable to the shareholders of the parent was TWD6.59b and the earnings per ordinary shares were TWD0.52.

Above is a short summary of UMC results for Q1 2013.

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

I will now turn the call to Mr. Yen, CEO of UMC.

Okay.

Thank you, Chitung.

Good morning, good afternoon and good evening to everyone on the line.

Firstly, I would like to talk about UMC's first quarter operating results.

UMC's overall first quarter operating result exceeded expectations.

The Foundry segment posted revenues of TWD26.37m.

Profit margin from Foundry operations was 4.1%.

And the wafer shipment reached 1.125m 8-inch equivalent wafers bringing overall capacity utilization rate to 78%.

Revenue contribution from 40-nanometer and below technologies grew from 15% in 4Q 2012 to 18% this quarter.

The New Business segment recorded TWD1.44b in revenue with operating loss of TWD0.079 -- TWD0.79b.

Losses mainly came from the solar subsidiaries as competition intensified across the industry.

As part of our long-term commitment to customers, we have continued to dedicate resources towards R&D and capacity expansion for 28-nanometer and below technologies.

We are also developing specialty technologies that cover a wide range of geometries to provide more comprehensive solutions, demonstrating our flexible approach to accommodate different customer business models.

Recently, we jointly collaborated with a leading NOR flash solution provider, Spansion, to deliver a System-on-Chip, SoC, platform on UMC's high-performance 40-nanometer process.

Leveraging the core expertise of the R&D we are committed to develop solid partnerships by offering flexible, cost effective and innovative technologies to customers in more diversified market segments.

Following several months of industry -- inventory correction in semiconductor market, demand has stabilized with the communications sector driving increasing demand.

We anticipate 2Q Foundry operating results to improve with wafer shipments projected to exceed 10% growth rate.

In the meantime, while we race ahead with R&D efforts and capacity expansion, management's priority is also focused on maintaining shareholders' interest.

Considering the overall financial health and long-term capital needs of the Company, the Board of the Directors has proposed for shareholders' approval a cash dividend payout of TWD0.40 per share, which constitutes about 60% cash dividend payout ratio.

Looking forward, we will sustain our efforts toward improving operating results, solidify UMC's profitability and maintaining business growth to maximize benefits to shareholders and customers.

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

For the Foundry segment the wafer shipment, as just mentioned, will around 12% to 14% increase.

For Foundry segment the ASP in US dollar will remain flat.

For Foundry segment profitability will be around low single-digit percentage operating margin.

The Foundry segment capacity utilization will be around low 80% range.

Guidance to New Business segment.

Revenue to be approximately TWD1.5b and operating loss will be around TWD800m.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up.

Thanks.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions).

Your first question comes from Steven Pelayo from HSBC.

Please ask your question.

Yes.

If we can focus on margins, your guidance for the second quarter low single digit for Foundry margins, operating margins, that's a lower margin than what you were doing a year ago on lower revenues but a similar utilization rate.

So can you itemize what are the drags that are pulling down your gross margin despite higher revenues and similar utilization rates, your gross and operating margins?

And specifically I am very interested in how much of the margin pressure is coming at the gross line versus the operating line as well.

Thank you.

Yes, Steven.

There are two one-off events in quarter may likely impact our operating margins.

First of all, we will have some early ramp costs associated with our 28-nanometer development.

So high expenses on some of the R&D wafers.

Those expenses will mostly happen in quarter two.

And secondly, there will also be some liquidation expenses caused by UMCJ's closing.

Although it used to be on the non-operating line, but after IFRS everything will be on the operating level.

So those two are the main one-off events.

And for the 28-nanometer-related costs, we estimate it should be TWD500m to TWD1b.

And as for the possible UMCJ liquidation cost, we don't have any estimate for now, but it may just happen.

Depends on how quickly we can liquidate the operation.

Okay.

Then can you maybe talk a little bit on a consolidated basis, as you look at the second quarter, what type of gross margins you're going to have?

Because it sounds like a lot of charges are going to be sitting in the OpEx line.

And so I just want to make sure I understand, on a consolidated basis, that's more of a normalized number and how that runs out going into the second half of the year.

For us, we can only really give guidance on the Foundry segment which is looking for a 12% to 14% quarter over quarter shipment growth, with flat ASP in US dollars.

So that should give you a rough idea about how our Foundry revenue going to be in second quarter.

Now on top of that we also provide guidance on our New Business segment which is mainly composed of solar business, which, unfortunately, will be similar situation like first quarter, which is about TWD1.5b in topline and operating loss is TWD500m.

So altogether, coupled with our low single-digit guidance on Foundry OM, that should give you a full picture of what the consolidated number looks like.

It gives me a picture what it looks like at the operating profit line, but once again I'm a little unclear what the moving parts are on what's in OpEx and what's in gross margin.

Can you just talk about the Foundry-only specific gross margin for the second quarter then?

That will be my last question.

It will be around 19%.

Okay, great.

I'll be back in the queue.

Thanks.

Your next question comes from Szeho Ng from BNP.

Please ask your question.

Hi, good evening.

With regard to the non-foundry business, what are you guys going to do to reduce the loss and improve the profitability?

This is mostly impacted by the global solar business demand, supply, which has been in a difficult position for quite a few quarters already.

What we've been doing for the last two, three quarters is, we have stopped all the capacity-expansion related CapEx and putting all our resources on driving the efficiencies and also looking for (inaudible) opportunities externally.

So before we can really reach any viable solutions, all we can do really is to cut down the cost, try to reach cash breakeven as early as possible.

As a matter of fact we should see some kind of improvement in the third quarter, based upon the current forecast for the solar-related business.

But for second quarter it will still be in the similar position as that in quarter one.

Thank you.

And second question, is there much utilization difference between your 8-inch and [top end] operations?

So which quarter you asking for?

For 2Q, yes.

Our Q2 8-inch is around 89% utilization rate and 12-inches is 78%.

Okay.

All right, okay, thank you very much.

Thank you.

Your next question comes from Donald Lu from Goldman Sachs.

Please ask the question.

Hi, good evening.

Yes, first to follow up on the last question why is it -- you just said 12-inch utilization right now is only 39% in the second quarter?

If that's true, what is causing such a low utilization rate?

Sorry, Donald, it should be high 70%.

So between 70% to 80%.

(Multiple speakers).

And 8-inch is high 80%.

Okay.

8-inch is 89%, 12-inch is high 80%.

No, 12-inch is high 70% and 8inch is high 80%.

Got it.

Thank you.

Yes, my first question is on this [Hotian] investment gain.

Will there be any more in the second quarter, or is that just a one-time event?

Just a one-off event.

One-off event, okay great.

And also for the solar business, for our modeling purpose, what should we model the revenue?

Would that be a gradual decline since you are not expanding capacity.

And also profit margin, like you said, in Q3 there might be a gradual improvement.

We will give quarter-by-quarter guidance for now, but this is capacity times ASP.

So the price has been stabilized and even rebound a little bit.

So for quarter three and quarter four you may have to consult with your solar analysts.

For the time being we will only give a quarter-by-quarter guidance.

Quarter by quarter, okay.

So, and you're not going to expand capacity anymore?

Under current circumstance, no.

Okay.

My next question is on just the overall strategy.

I think in the last year what happened in Global Foundry seems to be surging ahead in the 28-nanometer as the second source foundry.

And what's the game plan now?

Would UMC be more focused on return or are you going to try to catch up with global foundries?

I think what I'm trying to get is the CapEx.

Also maybe you can give us some color on -- in terms of CapEx to sales would that continue to decline or is that maybe just opportunistically it can go up again.

Yes, thank you for your question.

And, yes, we are now increasing our R&D resources and also our CapEx on 28-nanometer High k/metal gate versions process development.

So UMC is one of the two foundry companies provide the gate-last High k/metal gate process platforms.

So we believe the -- we will look still on under a development stage at this moment.

And we see the -- our progress, generally speaking, it's on track.

So yes.

And what is your --

And should we expect CapEx to sales opportunistically can still go up for UMC?

We will align those capacity demands with our customers' request.

So, so far we already built around 10,000 per month capacity on 28-nanometer technology.

So going forward we will continue to align with customers and also see UMC's -- we will follow UMC's progress, technology development milestone.

And so we will, yes, continue -- certainly we will continue up the capacity expansion to meet our customers' need.

Right.

Thank you.

I'll go back to the queue.

Thanks.

Your next question comes from Steven Pelayo from HSBC.

Please ask the question.

Yes.

Just a couple of quick questions.

28-nanometer, how do you expect that to track throughout the year, any targets as a percentage of mix by the end of the year?

You just said you had 10,000 wafers per month of capacity built.

I'm curious what kind of utilization rates you're going to have at 28-nanometer node as well.

So an update on 28 nanometer please?

Yes.

The -- our 28-nanometer we believe -- we still are, based on the customers' input, and for most of the customers the 28-nanometer technology, in terms of the transistor cost and device performance scan is not that great compared with the previous technology nodes.

So there are not many customers interested on this 28-nanometer -- 20-nanometer technology.

And but a few customers, for those -- for their time to market products they will engage 20, but I believe this is not in UMC's technology milestone and -- so we are still looking for any customers if they are request on 20 and their 20 technology milestone is in line with UMC's 20 technology milestone then we will continue to explore this opportunity.

But for now we are focused on 28- and 40-nanometer technology.

So, Steven you're asking about 28 or 20?

No, I had asked about 28.

Apologies if I misspoke..

The 28-nanometer your targets, second quarter and end of the year as a percentage of mix or total wafers.

Any updates on 28-nanometer?

Yes, the second half.

For 28-nanometer we still follow the guidance we provide last quarter which is hopefully by the year end we will see a low single digit coming from 28 nanometer technology, led by Poly/SiON technology first.

Okay.

And then just a quick final question from me, a housekeeping one.

You talked about solar becoming less of a drag in the second half of the year.

Is that something where you actually think you can get it to breakeven by the end of this year?

And then my last question is just can you help me understand, with all the movement going on in the operating expense line in the second quarter, what's a more normalized run rate for OpEx as I look into the second half of the year?

So thoughts for second half of the year in solar drag and then operating expenses.

Thank you.

For solar it's really difficult to predict.

We're only seeing the pricing is firming up a little bit.

So that's why coupled with our efficiency improvement we expect to see better performance in the third quarter, but we won't be very aggressive to predict a breakeven in solar right now.

We can only say quarter two will be similar to that of quarter one and quarter three should be, supposedly, a better performance coming out of our solar business.

And you were saying -- second question regarding the operating expenses, and I think whatever we have in quarter one on your financial statement, say about TWD4.5b to TWD5b at max should be the range you -- sorry.

Let me see.

Sorry.

TWD4.2b is the number for quarter one.

And I think you give a 10% up and down as the range should be the number for quarter two.

But that's on a more normalized basis, because you mentioned in the second quarter you have these liquidation issues and 28-nanometer early ramp-up costs --

That will be extraordinary.

So that's not included in the number I just quote you.

Okay.

All right, understood.

Thank you very much.

Thank you.

Your next question comes from Aaron Husock from ShearLink.

Please ask your question.

Great.

Thanks for taking my questions.

First, could you talk a little bit more about how you're thinking about R&D costs for the rest of the year?

I was a little surprised that R&D spending was down quarter over quarter and only up a little bit year over year, given how much you talk about investing in R&D for 28-nanometer.

Should we think about R&D growing meaningfully from here over the course of the rest of the year?

First of all, if you look at the consolidated number it will probably give you the conclusion that we actually have a lower R&D as a total percentage of revenue.

However, if you only look at the Foundry alone, we're actually still have more than 9% of our revenue spent on R&D.

And 9% is still the guideline generally we have to develop our technology road map.

Okay.

Okay, great.

Can you talk a little bit about -- as we see the foundry business recover in Q2, can you talk about where you think customer inventory levels would be exiting Q2 and how much visibility you have into Q3 at this point?

So as we mentioned in our opening speech, we do believe the overall industry, the inventory level has come down over the course of past few weeks.

And that's the reason, one of the main reason why we are seeing stronger shipment in the second quarter.

We would like to say that industry inventory level at this moment should be in the normal range.

And our visibility normally is about two to three months.

That's the current visibility we have.

Okay.

Are you generally thinking that the foundry business will grow again sequentially in Q3 or it's too early to say?

Yes, yes.

It will continue to grow through the Q3.

Okay.

Good.

Thank you.

Thank you.

(Operator Instructions).

Your next question comes from Donald Lu from Goldman Sachs.

Please ask the question.

Hi.

I have a question on the solar business.

Who are the minority shareholders for the business?

And also, Chitung just mentioned that you're looking for M&A opportunities.

You're obviously looking for -- to buy the complete -- or the rest of the stake, or UMC wants to sell the whole solar business to someone else?

The minority shareholder varies company to company.

For example our LED ventures there the shareholder is Epitex.

And for many of the solar business the minority shareholders are engineering teams.

So it varies.

As for the M&A opportunities, of course no one can really predict or plan that.

We're just looking for any methodology or possible ways to enhance the scale of economy or the competitiveness.

M&A looks like, given what happened in the industry, is one of the most likely solution as well.

Thanks.

Yes, my other question is more on the demand side.

Can you tell us in second quarter, like you said, communication is strong.

Is that driven by tablet and smartphone?

And in terms of product, is that more processor or LCD drivers?

So how about other applications, the trend in the second quarters.

Thank you.

Yes.

Our Q2 outlook the demand is mainly from -- actually across the sectors, including the consumer DTV set-top box and power management IC.

And also in communication sector, baseband and Wi-Fi.

In computer sector it's touch controllers and large display interface IC.

Yes.

Got it.

Thank you.

Welcome.

Your last question comes from Steven Pelayo from HSBC.

Please ask the question.

Sorry.

Hi, gentlemen, (inaudible) sorry.

Can we get an update on customer concentrations, I guess, as you look into the first and second quarter the number of customers, I don't know, what the top five represent and number of customers over 10% of revenue each.

Some details on concentration?

Yes, the top ten customer is occupying UMC around 60% to 70% total revenue.

And maybe top five and how many customers are above 10% of revenue?

Yes.

There is only one customer seen at 10% revenue.

And the top five around -- most of them are located around the 5% to 10% range.

Okay.

And then maybe just some more housekeeping ones.

The tax rate expectations for this year?

And as you look into the second quarter -- the non-operating gains are always surprises every quarter.

Do you have any visibility on that line going into the second quarter?

Not so much expected in second quarter for non-operating line.

Not much activity there.

And tax rate should be in between 15% to 20% this year.

20%, okay.

Last question is just you talked about pricing actually being relatively stable.

I think there has been some concern out there that SMIC getting more aggressive, Global Foundry is getting aggressive as well, that there would be more pricing pressures going on.

Is pricing stable for you because of just mix improvement, or can you talk a little bit about apples-to-apples pricing.

And into this new year has there been pricing pressures given more intense competitive environment?

Our guidance is flat ASP in US dollars in second quarter.

That of course is a combination of mix improvement and also some nominal price decline.

And both -- either one are relatively minor in second quarter.

Okay, thank you.

Thank you.

I would now like to hand the time back to today's presenter, Mr. Chitung Liu.

Please continue.

Thank you.

We would also like to take the opportunity to announce that our earnings conference call, the schedule will be changed going forward due to the integration of our local earnings conference call and the evening international conference call.

The call details will be sent out through our normal email notification channel.

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

Operator, back to you.

Ladies and gentlemen, that does conclude our conference for today.

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.