聯華電子 (UMC) 2013 Q2 法說會逐字稿

Welcome, everyone, to UMC's 2013 second-quarter 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 broadcast live over the Internet.

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

Please visit www.umc.com under the Investor Relations section.

And now 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 conference call for the second quarter of 2013.

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

Our CFO will firstly go over the details for the second-quarter financial results followed by our CEO's key message, including operating forecast, current market outlook and UMC's third quarter guidance.

After the CEO, CFO's statements, there will be a Q&A session.

UMC's quarterly financial reports are available at our website under UMC, under Investor Relations financial release section.

During this conference, we may make forward-looking statements based on management's current expectations and beliefs.

Those forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond the Company's control.

For these risks please refer to UMC's filings with the SEC in the US and the ROC Securities Authority.

I would like to introduce UMC's CFO, Mr. Chitung Liu to explain UMC's second quarter 2013 business results.

Thank you, Bowen, and good day, everyone.

For the second quarter of 2013 revenue was TWD31.91b with gross margin at 19.2% (sic - see presentation - "19.4%") and operating margin of 3.6%.

The net income attributable to the shareholders of parent was TWD1.81b and the earnings per ordinary shares were TWD0.15.

And operating utilization rate in the second quarter was 85% which compared to 78% in the first quarter.

We see a meaningful growth in terms of operating utilization rate and that's the main reason contribute to this 14.8% quarter-over-quarter revenue growth.

As we mentioned, revenue in the second quarter was TWD31.9b.

And in terms of first six months, revenue reached TWD59.6b or 5.4% year-over-year growth.

And gross margin was relatively stable, stayed at 17.9% to reach TWD10.6b.

And because of higher advanced node development, R&D cost has gone up by 15.4% so operating income was around 2.4% of revenue for the first six months to reach TWD1.4b.

And for EPS for the first six months is TWD0.67.

Cash on hand at the end of second quarter was TWD52.8b.

And stockholder equity at the end of second quarter was TWD210b.

And for the operating segment, among this TWD31.9b revenue, Foundry contributed around TWD30.3b, while the others or the remaining was mainly coming from our new business investment which includes Solar and LED.

And for the ASP in the second quarter which remained relatively flat compared to the previous quarter.

And for revenue breakdown we see growth coming from North American market which contributed about 47% of our total revenue.

And Asia shows a minor decline to 42% of our total revenue.

And IDM or Integrated Device Manufacture still accounts for around 10% of our total sales pool.

And communication actually grew the most in the second quarter of 2013 and reached 51% of total revenue breakdown and consumer electronics remained unchanged at 28% of our total revenue pool.

And we continue to show technology migration to the more advanced node and we are happy to disclose that 40-nanometer and below revenue has now reached 20% of our total sales in the second quarter.

And total revenue below 65 in Q2 was more than 51%.

And we have 5.2% capacity growth in the second quarter of 2013 which is mainly coming from the full-quarter recognition of He Jian capacity.

And for the next quarter or third quarter of 2013 we will see less than 1% capacity growth.

And that concludes my second-quarter financial results summary.

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

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

Okay, thank you, Chitung.

Hello, everyone.

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

The Foundry segment recorded TWD30.33b in revenues with profit margin from foundry operations of 5.3%.

Wafer shipments reached 1.307m 8-inch equivalent wafers bringing overall capacity utilization to 85%.

Revenue contribution from 40 and below technologies grew from 18% in the first quarter to 20% in the second quarter this year.

As the industry advances to more cutting-edge nodes our customers expect to adopt new technologies for their upcoming advanced products.

To satisfy their increasing reliance on leading-edge geometries, we have recently announced our participation in the IBM alliance for 10-nanometer FinFET CMOS process technology.

We are excited to team up with IBM and strongly believe the collaborative efforts will help overcome a variety of research challenges to realize groundbreaking results that will better serve the industry's needs.

UMC will offer up our upcoming process platforms based upon IBM's fundamental technology and develop derivative processes according to customers' requirements.

With the arrival of the third quarter, we project sequential revenue growth to follow a better than seasonal second quarter in the Foundry segment.

In the mid-term, to perpetuate our leading position in the advanced specialty technology segment, UMC's R&D team continues to pull in production milestones with enhanced process implementations to facilitate customer product development.

UMC's comprehensive range of technologies enables customers from a wide array of industry segments to differentiate their products, thus helping UMC to expand its business scope, elevate overall competitiveness and strengthen long-term profitability.

Our third quarter 2013 guidance are as follows.

The Foundry segment wafer shipments will increase 4% to 3%.

Foundry segment ASP will remain flat.

Foundry segment profitability will in the high single-digit percentage operating margin.

Foundry segment capacity utilization rate will in the mid 80s percent range.

Guidance for New Business Segment's revenue will be approximately TWD1.5b.

And operating loss will be approximately TWD600m.

Our CapEx will remain at $1.5b this year.

That concludes my comments.

We are now ready for questions.

Operator please open the lines up.

Thanks.

Thank you.

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

(Operator Instructions).

The first question is from Randy Abrams, Credit Suisse.

Go ahead please.

Okay, thank you.

Good afternoon.

First question is on the advanced technology, if you could give a sense for the 40 nanometer, how you expect that to ramp up or continue to ramp through the second half.

And if you could provide an update on the status for the 28 poly-SiON and high-k metal gate?

Okay, yes.

Our 40 nanometer revenue in Q2 is around 20% of our total sales.

Based on today's capacity profile, our 40-nanometer capacity can reach 20% to 25% of revenue contribution.

Our 40-nanometer revenue will be close to 20% in the third quarter this year.

And overall chip demand, including 40 nanometer, will always highly related to the market and inventory situation.

We did see some downward revision on forecast number recently.

More time will be needed to see the fourth quarter chip demand, including 40 nanometer.

Okay.

Okay.

Spoken in Mandarin

I may have missed it but could you elaborate the --- you might have mentioned in Chinese, the 28 nanometer, poly-SiON and high-k metal gate status?

Okay.

UMC's 28 nanometer engineering progress is generally on track and our [DD] performance will be very depending on the timing of engagement.

Our overall chip demand, including 28 nanometer will always be highly related to the market and inventory situation.

We did observe some downward revision on forecast number recently.

More time will be needed to see --- to check the Q4's chip demand.

And for the 28 nanometer poly-SiON version we expect to contribute low single-digit percent of sales by the end of this year.

And for the high-k metal gate, high performance version will trail poly-SiON by one to two quarters.

Randy, I will do a quick translation in Mandarin.

So that's the question we have for you, Randy.

Okay, thank you.

And could you talk on the other side, the 8-inch there was an authorization for some additional capacity, maybe talk about where utilization reached on 8-inch and what you're seeing for strength from that area maybe driving the need for more capacity and whether your existing fabs could handle that or you need to acquire a fab.

Yes.

Our 8-inch utilization rate is around high 80%.

And for 12-inch is around low 80%.

Okay, and --

And our 8-inch mostly is around the driver, the driver and power management IC.

And for the 12-inch it's mainly on communication products, Wi-Fi and application processor for baseband.

Thanks.

Okay.

And do you have interests in acquiring additional capacity?

Looks like you've some headroom on utilization on 8-inch still.

So the answer will be that even though our 8-inch loading is around high 80%, but certain segment has reached full capacity.

So for this particular segment we are mandated by our Board meeting to look for immediate solutions in terms of the capacity shortage and that doesn't really means the overall capacity utilization rate for 80 --- for 8-inch need to be close to 100% before we look for additional capacity for 8-inch.

Thank you.

Okay.

And one quick question, one final quick question.

The UMC Japan in 28 nanometer was scrapped.

If you could provide an update on maybe the magnitude of those charges, if you've taken those, or timing to take those one-time charges?

So we pretty much complete all the wafer scrap related expense in both quarter one and quarter two so there shouldn't be any remaining for the coming quarters related to the wafer scrap.

As for UMC Japan liquidation costs, we are still looking for the final buyers for our remaining facility and share.

And for the guidance of high single digit of operating profit margin for the third quarter, we did not include or we did not factor the potential or possible liquidation loss on the UMCJ closure.

Thank you.

Okay, thank you.

The next question is from Dan Heyler, Merrill Lynch.

Please ask your question.

Thanks.

Hi, Chitung.

Just a few quick ones from me.

Your R&D in the presentation was up pretty high in the second quarter.

What are your thoughts on the third and fourth quarter for R&D and depreciation?

Our R&D expense over our total sales will be increased a little bit, roughly 1% and for the development of 14 and 10 nanometer technology.

So we will -- about will maintain this number for the coming quarters.

Thank you.

Okay.

And then depreciation, Chitung, if you could maybe just give me the full year number you're looking for?

Still the same, still less than 10% growth compared to the previous year.

Okay, great.

And another just on -- help me with the number on utilization which went from 78% to 85%.

Your capacity increased 5.2% but shipments were up 16%, so there looks to be a little bit of a disconnect in those numbers, against 16% unit growth, so can you explain the gap there, Chitung?

So 85% divided by 78% times or plus additional capacity coming from He Jian.

I think that's mainly the reason.

Okay, because that's a 7 percentage point difference because you had 16% increase in shipments plus the 5% so I get about 11%.

But maybe it's average utilization; maybe that's the difference?

Yes, that's average and also there's always some difference between wafer shipment and wafer out.

Exactly.

Okay, thanks.

And then looking at your --- in the past it was interesting, looking at your IDM contribution, Mr. Yen, you've been --- you're quite high, as high as 17% of revenue just last year.

Maybe update us a bit on whether there's some opportunities within the IDM universe because that business seems to have come down quite a bit relative to a year ago.

This is mainly because we calculate, we define the IDM versus the fabless [developers], their contribution.

So for some IDM companies they do not invest on leading-edge technology development.

So in that kind of case we categorize them into the [fab-based] companies like fables companies.

That's why the IDM companies' share reduced.

The other reason is one of our key customers they exit, let's say, the [conventional] application process business.

So that also affect a little bit on this pie share.

Sorry, Dan, I need to do a little bit translation here.

Okay.

And just finally on that front, on the IDM side I'm not sure if you have a calculation in what's your, say, specialty technology is in contribution of sales, specialty derivative technology and what your strategy there is to build out that business?

Yes, our specialty technology, the revenue contribution is around [30%].

And, yes, we actually invest a lot on our specialty technology, especially high-end specialty technology which is -- UMC is in very good position and especially in China market and [so on].

We will continue to enlarge UMC's specialty technology share.

And also the -- yes, we already launched, we established a specialty technology R&D center in Singapore, that's our Singapore 12-inch fab for the high-end specialty technology development.

Sorry.

Then quickly, translation, sorry, Dan.

Okay, thank you.

All from me.

Thanks.

(Operator Instructions).

The next question is from Szeho Ng, BNP Paribas.

Go ahead please.

Hi.

Good evening, gentlemen.

I just want to know the gross margin for the two divisions, for the Foundry and also for the new business in Q2 and what's your expectation going to Q3.

Sorry, Szeho, your line is breaking up, can you repeat your question again please.

Yes, sure.

Could you just share with us the gross margin for the two divisions in Q2, for Foundry and also for the new business and the expectation going into Q3?

Well, we basically --- if you go to the handout on the page of segment information, on the page seven, you can see the operating line.

We don't really disclose anything beyond this because it is financial statement related so that's the most we can disclose.

But actually it shouldn't be difficult for you to figure it out.

I see, yes.

And for other revenue, let me repeat that segment in the second quarter was roughly about TWD1.6b operating loss or segment loss of TWD574m.

Sorry a quick translation.

Okay.

Yes.

And my second question is related to the 28 nano scrapped wafer cost.

How much did you book in Q2 and in which line did you book it?

In Q2 is roughly TWD400m to TWD500m.

I see, all right.

And in the operating line I believe it was the R&D line?

No, it's in the --- yes, it's in the --- the scrapped wafer was in the operating expense, but mainly in the [LCM] item.

Sorry which area.

In the inventory and LCM item.

Okay, all right.

Okay, I see.

And last question, when I look at depreciation at cost of goods sold, it has gone up quite a bit in Q2.

How should we comprehend it?

Again, I don't have the breakdown number with me right now, but first of all for the whole of depreciation expense this year, as I mentioned earlier, shouldn't be more than 10% growth from the previous year.

And for the quarterly pattern, it actually should be pretty linear.

So sometimes it has to do with our WIP, work in process so it's a little bit hard to pinpoint on a quarter-to-quarter movement.

I see.

Okay, all right, got you.

Thank you very much Chitung.

Thank you.

Thank you.

The next question is from Andrew Lu, Barclays Capital Research.

Go ahead please.

(Spoken in Mandarin).

I have a couple of questions to follow up.

First one, do you expect your Q4 will have a similar decline like the TSMC 8% to 10% QoQ?

(Spoken in Mandarin).

So the question is really asking how UMC sees Q4.

We cannot give Q4 guidance until the next quarter.

However, as our CEO mentioned earlier, he has seen some downward revision on the following quarter in terms of demand forecast, so it is happening.

Thank you.

The second question I have is related to the tax rate.

I see the second quarter tax rate is only about 2%.

Is that Q3 is going to change back to earlier guidance 14%?

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

Thank you.

So, Andrew, sorry I need to do a quick translation.

So the question was has UMC seen 40-nanometer revenue pool to shrink because certain customers may integrate Wi-Fi into AP chips and our CEO has answered that we still see relatively good demand from 40-nanometer or Wi-Fi demand.

And we understand that some of the customers may -- some of the fabless designers may integrate Wi-Fi into AP.

But for UMC's client profile, at least for the near term, we haven't really seen that situation -- scenario yet.

Thank you.

The next question is from Eric Chen, Daiwa.

Go ahead please.

Hi, Mr. Yen and Chitung.

And first I would like to know your China strategy.

Could you give me an update in terms of revenue percentage from the China based the IC design house?

And how about the He Jian, in term of He Jian, the geometry and the schedule?

Thank you.

On the China, He Jian is around less than 10% of our total foundry sales.

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

Sorry, Eric, I need to do a quick translation.

So China sales is currently less than 10% of our foundry business.

Since UMC controlled He Jian in Q1 2013, we have leveraged geographic advantage and sales channels to enlarge our Chinese foundry business and we also benefit from the strength of Chinese mobile computing market including AP, BV, display driver, touch controller etc., etc.

And although there is still seasonal demand or seasonal correction for Chinese market, but we are happy to see that there are actually 40-nanometer or 55-nanometer demand coming from Chinese market.

This is a really advanced node.

Thanks.

Okay, thank you.

(Spoken in Mandarin).

(Spoken in Mandarin).

So we don't have any plan for rights issue per se and if there's any, we will of course announce it following the regulation.

(Spoken in Mandarin).

Even though we don't have any immediate plan for rights issue, we do have a private placement proposal approved by our shareholders' meeting for the last two years and the quota is roughly 10% of the issuance shares.

And the purpose is really looking for strategic investor who can bring value to UMC in terms of technology development, sales channel and manufacturing etc., etc.

So we are not really looking for a financial investor or just purely capital.

But we're do looking for synergy.

And that's the reason why even though it has been approved by the shareholder meeting for two years, we haven't really been able to close this deal.

But for the time being we're still open for any potential opportunity out there.

Thank you.

Okay, thank you.

(Spoken in Mandarin).

So the question is related to our specialty technology as a percentage of revenue.

(Spoken in Mandarin).

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(Operator Instructions).

The next question is from Roland Shu, Citi.

Go ahead please.

(Spoken in Mandarin).

(inaudible).

So the revenue guidance for the third quarter, the growth rate in terms of wafer shipment is 3% to 4% and the ASP will remain flat.

(Spoken in Mandarin).

(Interpreted).

According to our capacity, [55-nanometer] at the most can contribute 30% to 35% of our revenue.

(Spoken in Mandarin).

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It could be as long as two to three quarters.

(Spoken in Mandarin).

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The next question is from (inaudible) Morgan Stanley.

Please ask your question.

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

Okay.

(Spoken in Mandarin).

So the question is related to our view regarding the overall inventory situation for semiconductor industry for Q3 and Q4.

(Spoken in Mandarin).

(Spoken in Mandarin).

The next question is from Julie Tsai, UBS.

Go ahead please.

(Spoken in Mandarin).

The question was related to the capacity shortage for certain segments of 8-inch capacity and there's been speculation that the 8-inch wafer price may have gone or has potential to go up.

(Interpreted).

So the answer is we have seen some price enhancement mainly coming from technology migration, for example to the 55-nanometer high voltage and not so much for like-to-like technology.

(Spoken in Mandarin).

-- should compare to other so-called non-specialty product which is other 70% (spoken in Mandarin).

The question is regarding margin for specialty versus non-specialty.

(Spoken in Mandarin).

So there's no answers really for so-called specialty or non-specialty in terms of profit margin difference.

Still it largely depends on the utilization rate for that given fab as well as the depreciation expenses or the depreciation schedule for that particular fab.

So that leads to my third question then.

Why call these IC specialty IC?

Why not just categorize them into end user products or something like that?

(Spoken in Mandarin).

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Okay.

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Thank you.

The last question is from Donald Lu, Goldman Sachs.

Go ahead please.

(Spoken in Mandarin).

So the question is related to our 28-nanometer and beyond, customer penetration strategy.

Are we going to focus more on second source or are we going to focus more on design business, second wave business?

(Interpreted).

So this is a little bit complicated.

I will try my best.

So for 28-nanometer we continue to see both design in as well as second source business and even for the second source business we can still deploy certain variation.

Later on, it could be considered as designing as well because it's highly customized.

So for 28-nanometer, so far we still believe there's a big enough addressable market for UMC to execute our current strategy.

(Spoken in Mandarin).

The two questions are related to UMC's how we're going to expedite our R&D development through joining the IBM 14 and 10 development alliance and what's our view on the IBM alliance versus our experience in the past, how we're going to, better if you will, execute this time around.

(Spoken in Mandarin).

So to do a quick translation, basically we are becoming more open in terms of R&D strategy.

So compared to the past, when we were more so-called in house and now we actually collaborate more with third party or external resources.

Along with joining IBM alliance we also deploy more third-party technology or quality assurance techniques etc., etc.

And in terms of resources concentration we also decided to shelve 20-nanometer development and concentrate a lot more resources on to 14-nanometer FinFET technology.

So hopefully this one along with our execution can expedite the schedule compared to the past pattern.

(Spoken in Mandarin) to prepare for CapEx next year.

(Spoken in Mandarin).

(Spoken in Mandarin) keep at that level, kind of at the current level.

(Spoken in Mandarin).

(Spoken in Mandarin).

Thank you.

Thank you for all your questions.

I will turn it back over to the CFO, Mr. Chitung Liu.

Go ahead please.

Again thank you very much for attending our conference today.

All the material has been posted on our website under the Investor Relations section and we have our upcoming quarterly conference in November and see you then.

Thank you.

Back to you, operator.

Thank you, ladies and gentlemen.

This concludes 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 section.

You may disconnect now.

Good bye.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call.

The interpreter was provided by the Company sponsoring this Event.