UMC 联华电子

Operator

Welcome everyone to UMC's 2007 Q4 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is being broadcast live over the Internet. Webcast replay will be available within one hour after the conference is finished. Please visit www.umc.com under the Investor Relations section. I would now like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin.

Chitung Liu

Thank you, Jerry. Good day everyone. Thank you for joining UMC's fourth quarter 2007 conference call. We are hosting this conference call from Taipei. And with me here are; Dr. Jackson Hu, Chairman and CEO of UMC; and Mr. Bowen Huang, Senior IR manager. Dr. Jackson Hu, who will help report our fourth quarter results. During today's conference call we will first review our financial results for the fourth quarter in 2007, and then Dr. Hu, will provide an update for our business and forward-looking guidance followed by lastly with the Q&A session. Before we started I'd like to remind you of UMC's Safe Harbor policy. That is that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on management's current expectations and beliefs and 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 U.S. and the ROC securities authorities. Now I'd like to provide a short summary of our results for the fourth quarter 2007. Quarter-over-quarter revenue decreased by approximately 11% to NT$27.62 billion, and 5.8% year-over-year increased compared to the fourth quarter in 2006. Gross profit for the quarter was NT$5.6 billion representing 20.5% gross margin. Operating profit was NT$1.4 billion with operating margin of 4.8% for this quarter. Net income was NT$1.4 billion which decreased by 85% quarter-over-quarter and decreased 76% compared to the net income in the fourth quarter of 2006. EPS for the quarter was NT$0.16 and earnings per ADS were US$0.025. For year 2007 year-over-year revenue increased by 2.6% to NT$106.8 billion. Gross margin and operating margin for year 2007 were 21% and 6.4% respectively. Compared to 19.9% and 5.9% in 2006. Net income for 2007 was NT$15.96 billion a decrease of 48% year-over-year. The full year EPS were NT$1.09, this is based upon the weighted average shares issuance after our capital reduction, and earnings per ADS were US$0.168. You can look for more details within the financial data accompany our ... that accompany our press release today. Now let me turn the call over to Jackson, and he will provide you with the business update and outlook for the first quarter in 2008.

Jackson Hu

Thank you, Chitung. Hello, everyone and welcome to our conference call, and thank you for joining us today. As always that we appreciate your interest in UMC. First of all I'd like to say happy New Year to everyone. Today I will touch on the highlights and provide further details on our performance and the key activities impacting our business in Q1 2008. Due to normal seasonality in the first quarter, we see shipments dropping between 14% and 15% from Q4. On the other hand, ASPs are expected to rise by about 0% to 1% due to an increase in 65 nanometer shipments. Overall capacity utilization is expected to be about 70%, with contribution from 90 nanometer and 65 nanometer products accounting for more than 35% of total revenue. As far as applications are concerned, we are seeing the largest seasonal corrections in the communications segment, followed by consumer segments. PC related products are seeing the smallest correction. Capital expenditures for 2008 will be between US$500 million and US$700 million. The major focus of this year's spending will be to improve capacity mix for our 8-inch and the 12-inch production lines by increasing the percentage of advanced technology capacity and improving ASPs. Effective use of our capacity will give us the potential to well support customers' demand upside in 2008. As a matter of fact with the current capacity expenditures we can support 20% plus, our revenue increase if the demand recovers and become very strong. As far as technology development is concerned, our 45 nanometer program is moving along smoothly with several customer prototypes. We expected to see a small amount of 35 nanometer production in the second half of the year. Our 32 nanometer development program is also on schedule. In addition to joint development programs with our IDM and fabless customers, we continue to cooperate with many of the industry's leading research organizations, including ATDF, IME, and potentially IMEC or IMEC. Going forward, we do not rollout further technology development alliances, such as our current activities with Elpida. With regard to employee bonuses, we will follow the prevailing industry practice in Taiwan, and reserve 15% of the profits for employee bonus compensation. Further details of this plan will be finalized in the March Board of Directors Meeting. Now, let me provide you a summary of this guidance of the first quarter of 2008. Wafer shipments are to decrease by approximately 13% to 15%. Wafer ASP in US dollars is expected to increase by approximately 0% to 1%. Capacity utilization rates will be approximately 70%. As for profitability, gross profit margin will be approximately 12% to 13% that implies we will have a small amount of operating loss in Q1. Percentage of 90-nanometer and below revenues will be more than 35%. The communication sector is expected to be the weakest, followed by consumer and the computer segments. And finally, 2008 CapEx budget is expected to be in the range of US$500 million to US$700 million. That is for my report. Now, let's begin the Q&A session. Operator? Question And Answer

Operator

Thank you. We will now begin question-and-answer session. [Operator Instructions] Our first question is from William in UBS in Taiwan. Please go ahead William.

William Dong

Thank you, and good evening. I have a quick question in terms of the cash flow. I think in terms of with reducing CapEx this year, are there future plans for the excess cash will be cumulating?

Chitung Liu

This year, we are scheduled to payback some of the outstanding debts total amount would be around NT$20 billion, and we also plan to payout five portions of our dividend in the form of cash. And therefore, we shouldn't have too much excess cash at the year end of 2008 given that currently we are holding our cash of about, a little bit short of NT$40 billion. But always our capital restructure will be our important topic and this year we will continue to cancel some of the treasury shares on hand. As a matter of fact, I believe by mid of this year we are going to cancel something like 2.5% of the outstanding shares. So, that will be part of our capital restructure plans, but I don't believe in the near term especially for the fall 2008 we have too much excess cash to conduct massive our restructure.

William Dong

Okay. And my second question relates to, I think you mentioned about technology licensing or partnership for future technology development. Now we know that you've been working with Elpida on memory side. Could you elaborate a bit more on how... for one the memory side is progressing?

Jackson Hu

It is progressing very, very well. As we disclosed in the press release last time that we will license the cooper low-k technology to Elpida for its future generation of DRAM development and that process is going on very, very well.

William Dong

And one other question I have was sort of, what is the consideration for potentially licensing from the technology from other sort of partners. Is it because we can actually have greater economy of scale in terms of sharing the resources. Is that a consideration?

Jackson Hu

That is... that could play one key consideration, and as you know on the advanced technology side it's becoming more difficult because new materials, new equipment are constantly needed and therefore having the right partners would help us accelerating the development of our own process.

William Dong

Okay. Thank You.

Operator

The next question is from Steven from HSBC in Hong Kong. Please go ahead Steven.

Steven Pelayo

Hi, thanks for taking my question. First one is about employee bonus. You are saying 15% of profit. Is that 50% of operating or net profit. The reason I ask is that non-operating income portion can be kind of forward talk right?

Chitung Liu

We hope, 15% of net income.

Steven Pelayo

Okay, thanks. And then talking about the 65 nanometer revenue ramp in Q1, I know you say that less than 90 is going to be 35% of the total. Could you give us an idea of how much 65 nanometer will represent?

Jackson Hu

It will be maybe between 5% to 7%.

Steven Pelayo

And could you give us a little bit of color as to the best, is this to one or two products several customers what sort of segment it is coming from?

Jackson Hu

It covers three application area, and the several customers maybe that's the best way of putting it so far.

Steven Pelayo

Okay, thanks. And then last question is regarding 2008 CapEx. You are guiding 500 million to 700 million. Could you give us an idea of how much ... I think you are talking about converting 200 millimeters, sorry 300 millimeters converting 130 nanometer to 65 and 200 million [ph] I don't remember exactly what you are converting to, but could you get an idea of roughly how much capacity you can convert for how many dollars?

Jackson Hu

Yes. Are you asking for the breakdown between 8-inch and 12-inch?

Steven Pelayo

I guess I am trying to get an idea of how much does it cost to convert the capacity, I imagine it's going to be different for 300 versus 200?

Jackson Hu

That is fine, for 200-millimeter about 10% of the total capital spending will be for 200 millimeter and then for 300 millimeter 64% is for fab, 26% is for R&D. Total added up to 100%.

Steven Pelayo

And how much capacity can you convert for this amount of money?

Jackson Hu

Okay. To answer your pervious questions for 8-inch we will be converting 2.5 and more capacity in a 0.218 micron category, okay. And the totally for the whole year we expect probably 4% of the capacity increase after the conversion with better capacity mix.

Steven Pelayo

Is the 4% of 8-inch capacity in total?

Jackson Hu

Total.

Steven Pelayo

Total. Okay. I guess I am just trying to get an idea of how efficient, how much more revenue can we generate with per CapEx dollar rate. So I mean for example if you talk about new capacity we can talk about rough use from where your cost maybe 200 million capacity. I am just trying to get a rough idea of what that conversion cost?

Jackson Hu

Okay. I do not have that number on top of my head, but as I mentioned earlier was the current capacity spending. We will have enough of capacity and if the demand is strong and we can support up to 20% plus of revenue growth.

Steven Pelayo

Okay. Thank you, guys. That's all from me.

Operator

Next question is from Adam [ph] from Credit Suisse in Taipei. Please go ahead Adam.

Randy Abrams

Yes, hi, this is Randy Abrams. Yes just a couple of questions up... on the 90 nanometer, then going to over to 35% and price going up in first quarter. Could you talk about the applications on the 90 nanometer as well that are going to be growing against your overall guidance?

Jackson Hu

The 35% plus is the combination of 90 nanometer and 65 nanometer. So from that point, it covers a broad range of applications from graphics on cell phones, wirelines, and consumer products, so pretty much every application sector.

Randy Abrams

Okay. And on the technology license, there's one follow-up on that, but could you elaborate on your thinking behind something as broad as IBM Alliance, do you see something like that at this stage making sense?

Jackson Hu

It's too early to comment, but I can say is that we are open and to any good potential partners. So you can see that we are exploring or evaluating other possibilities with that they over mind.

Randy Abrams

Okay. When you look at on your second quarter maybe it's early to look at it, but after two double-digit or low double-digit declines what's your view at this stage for second quarter could we see a better snap-back or you still taking cautious view in this environment?

Jackson Hu

In this environment of course the visibility is limited, but what we can say is our March revenue will be better than January, so if that's continues it will be a good sign of recovery.

Randy Abrams

Okay. And one last question, on the non-operating line, do you expect to do any meaningful sales in the coming quarter, I guess given where the market, are you going to... hold-out for now?

Jackson Hu

I think nothing in the first quarter given the current weak market condition, but our long term goal of divesting non-core asset would certainly continue and I don't think the major trend will change from the last two years. However, in the near term, I -- we will still need to monitor the opportunity.

Randy Abrams

Okay, thanks a lot. Have a good evening.

Jackson Hu

Thanks.

Operator

The next question is from Bhavin Shah of J.P. Morgan, in Hong Kong. Please go ahead.

Bhavin Shah - J.P. Morgan

Yes, I just wanted to talk a little bit how the profitability and direction I guess leading edge business is improving nicely, but we're still not seeing any clear turn around in profitability. How, what... beyond this sort of sharp drop in volume that you have to deal with, given the environment and so on. What exactly do you think UMC can do to return to a pretty strong historical record that you had several years ago of very strong return on capital and so on. Can you talk a little bit more about what you can do in longer term to become more profitable?

Jackson Hu

Okay. First of all in the current quarter the probability is not showing yet due to the increase of the... of the increasing advanced process technology volume. And that is the current utilization was poor. So once that your utilization improve then we will definitely be have higher ASP and the benefits of that reflected in possibility. I think today we announce that we are going to significantly reduce the capital spending, which is the first step toward improving profitability over a long-term basis. So I hope that answers your question.

Bhavin Shah - J.P. Morgan

Yeah, thank you. And well... and second question is on the employee bonus expensing. If you let say you do not have any expensing, you know, if you have an operating loss. How does the full year work out is it on a full year income basis in other words you will have to... that come from more in the second... subsequent quarters or can you just talk a little bit how exactly it will work?

Chitung Liu

Based on our quarterly earnings basis, so if there is no quarterly earnings there will be no expense. So you will be refer the expense on our quarterly performance.

Operator

The next question is from Pranab Sarmah of Daiwa in Hong Kong. Please go ahead, Pranab.

Pranab Sarmah

Thank you. Jackson, could you give us a little bit of idea about the pricing trend on the same technology note on first quarter and do you see any stability of the pricing in the near future in this year?

Jackson Hu

It's... if you look at back into the ASP of 2007 for the whole year is very much flat, and we hope that as increasing volume of advanced process technology production such as 65 nanometer and our ASP will gradually improve and for the royalty as far as much as I can say at this point.

Pranab Sarmah

On advanced technology note there were abnormally high pricing pressure in 2007 and are you seeing any slowdown on that pricing pressure in 2008 or you think that it might happen maybe in second half of 08?

Jackson Hu

Yeah the high pressure will stay there for the near term. At least for the next two or three quarters.

Pranab Sarmah

Next two three quarters, okay got it. And you also had a big plan for couple of mega fabs in Taiwan. Is there anything going on there or those projects are being shelved for the time being given economic condition is not good?

Jackson Hu

Okay, can you be more specific of which one are you referring to?

Pranab Sarmah

I think you had a plan to put three big fabs in Taiwan putting about 10 billion sort of investment over next four or five six years. I think you made an announcement about one and half year back?

Jackson Hu

Okay. I think you're referring to the fab 3 and fab 4 [ph] of our 12-inch fab in Taiwan.

Pranab Sarmah

Taiwan, exactly, yes.

Jackson Hu

The construction is ongoing slowly because we don't see the need to rush it, and as far as the timing for moving the equipment in and we're also very conscious right now considering the current economic situation.

Pranab Sarmah

Okay. Okay. Thank you.

Operator

There are currently no more questions in queue. [Operator Instructions] Our next question comes from Donald Lu of Goldman Sachs. Please go ahead, Donald.

Donald Lu

Hi, yes. Can you just reiterate what is the cash dividend policy for fiscal 2007? And also it seems like the employee stock bonus policy in this year is going to be higher than last year. Can you just give us idea like how much percentage of that 15% would be in the cost of goods sold and operating expense?

Chitung Liu

Well to answer your first question, we will propose to the Board that to payout of very high portion of the dividend in cash. But this is the subject to the Board's approval at the meeting in the March. So...

Donald Lu

How much percent are it still?

Chitung Liu

Very high percentage.

Donald Lu

Over 70%?

Chitung Liu

Well I cannot give you a fixed ratio, but if you recall last year we pay 100% cash. This year we will certainly propose a very high portion as well.

Donald Lu

Okay.

Chitung Liu

And your second question regarding employee bonus expense. As we mentioned we will follow the industry average by using 15% as a benchmark to preserve or to resent the employee bonus our quarterly basis to our 08 operation. And that's amount what we paid in naturally 2009. But for 2008 payout from 2007 earnings. This is somewhat subject to the old practice. And that's again will be subject to the Board approval by March or April.

Donald Lu

Okay. Yes, I have another question on this potential technology alliance. Basically, I just want to get an idea. Currently at 90 nano... 65 and 45 nanometer what is the ballpark for the R&D expense for UMC, and for each note, and also what kind of CapEx would be economically reasonable for each note, assuming that once you develop the technology, you would have to build the capacity to keep this reasonable return, so what would be the reasonable average CapEx?

Jackson Hu

Donald just a second please. I am sorry, Okay. Hi Don. First of all, we did not... we do not have the number that you needed for the development of each note, we can go back and we calculated that and hopefully communicate that with you later. But, what I can explain to you is that this is the spending on the new technology note is the result of our accumulated R&D efforts. So many people think that we may need this tremendous amount of R&D spending for each note, but as a matter of fact it's the incremental effort. For example from 65 nanometer to 45 Nanometer the new equipment is the emerging scanner, and the new technology could be the silicon... the new material could be silicon germanium and things like that. Since we have a solid technology development background. So with the each new note if the incremental efforts and spending to us.

Donald Lu

Okay.

Jackson Hu

But as I said we can try to calculate the number going back and try to divide it up between 65, 45 and how much we'll have to spend. And as far as how much capacity we needed for supporting each new notes that is also a question of design win, okay, and if we have competitive process technology, which we do and then we have large customers engaged with us in each application sectors then the potential volume will improve and therefore now the CapEx spending will be planned based on that. And however there's another timing factor in there, right? And as I pointed out earlier, that we're seeing people keeping notes due to the increase in complexity of the design. So we have to gauge when is the proper timing for bringing up capacity, so I hope that I answered your first question.

Donald Lu

Yeah, okay, great. Thank you.

Operator

The next question is from Jeffrey Toder of ABN AMRO in Taiwan. Please go ahead, Jeffrey.

Jeffrey Toder

Yes.Good evening. I have a few questions. First, as you mentioned that there is some correction and obviously your utilization rate is dropping in the first quarter. Would you say that, that's more due to macro factors or micro factors?

Jackson Hu

Okay, I believe that most of that is due to no more seasonality adjustment, and there could be some adjusted affected by the macro factor that is harder to separate. And as a matter of fact based on the feedback from many large customers, they are cautiously optimistic about the growth for this year and the main of them predicted single-digit growth for this year.

Jeffrey Toder

Okay. And you mentioned earlier that you are March looks better than your January.

Jackson Hu

Yes.

Jeffrey Toder

Could you give some indication as to what types of products or what sectors you see the improvements in at that time?

Jackson Hu

Cell phones will increase, and hopefully PC sector will improve.

Jeffrey Toder

Okay. On the CapEx I think last quarter's call and then the conference you were talking about the CapEx cut in 2008 as being temporary. In other words, you thought that you had spent enough preparing for the next migration in 2007 and that would take you through to 2008. Are you still of the same opinion, which will indicate or imply that we've seen increase in CapEx subsequent to this year or do you think that the reduced CapEx might be something that we will see going forward?

Jackson Hu

Okay. Now first of all I mentioned earlier the main purpose for this years spending is to convert the production mix to more advanced notes for example from 0.13 micron to 65 nanometer, because so many large customers are converting their product of portfolio in such a way. And as far as future spending it all depending on customers design... design activity. Again I would like to emphasize giving notes use of trend is apparently is taking longer for customers to design their products and qualify their product. So our capacity expansion pace, you know should based on their progress.

Jeffrey Toder

Okay. Could you see, I think you had a question earlier, but I am not sure if I caught the answer which was asking what you thought your capacity be at the end of the year might be given your CapEx dollars?

Jackson Hu

It would be approximately 4% more than today.

Jeffrey Toder

So, as in first quarter or fourth quarter last year?

Chitung Liu

That's a year-over-year increase.

Jackson Hu

Year-over-year increase, yes.

Jeffrey Toder

Year-over-year for Q1 average year over average, yes.

Chitung Liu

So total capacity in 08 will be 4% more than the total capacity in 07.

Jeffrey Toder

Okay, got it. Could you see a scenario perhaps where going forward at least for the foreseeable future, where you might be investing in moving to more advanced technology notes, but not really increasing capacity very much?

Jackson Hu

Well there's that possibility and like this year it's exactly like that. But, the capacity mix will be improved significantly.

Jeffrey Toder

Okay. I have I guess two further questions. Your R&D in fourth quarter increased quite substantially, and I was wondering if you could give some color to why that increased and what you might be expecting for R&D for 2008?

Chitung Liu

I think we have more activity on 45 nanometers in Q4 2007, and as for the overall R&D expense in absolute dollar terms probably year-over-year we'll see a small increase from 08 to 07.

Jeffrey Toder

Okay, great. And I guess it's a final question, we talked about dividends a bit. I guess you're entering this year with a lower EPS based on your guidance, but your cash flow seems quite healthy. Would you be able to payout more than 100% in 2008, if you had high free cash flow, but your EPS wasn't as high?

Chitung Liu

I think how we did on capital retention is the only solution we can do given the return in consent in 2007, and as I mentioned in 2008, yes, we do have a strong free cash flow, but we also have schedule debt to our pay back and for the time being I don't foresee anything significant in the near future, but what we'll do is first of all on the cash dividend, we were try to propose the Board with very high percentage, and secondly we will continue to cancel the treasury shares on hand whenever there is a opportunity.

Jeffrey Toder

Okay, excellent. Thank you very much.

Chitung Liu

Thank you.

Operator

The next question comes from Lu of Global Trend Capital in the U.S. [ph] Please go ahead Lu.

Unidentified Analyst

Two quick questions number one is the roughly, what operating rates given current market condition and migration to higher or more advanced notes, which you need to break even for sometime in let's say in the second half of calendar 08? And second one is a more general question, it does appear that I guess there's no great revolution, but there is obviously it seems to be one profitable foundry company, in tough times. And I was wondering how UMC can improve its profitability overtime and whether the chances of the holding to positive profit dollars whether we have the next step?

Jackson Hu

Okay. Yes, I think our break even points is somewhere between 72% to75%, and then going to your second question I think the reduced or significant reduced the CapEx spending is our first step toward improving the profitability. As you can see our [Indiscernible] was to be improving capacity mix will have higher ASP mix and you know lower depreciation costs during the future.

Unidentified Analyst

So you need to go to Alliance Board as let say the IBM Alliance where you have quite a few members in terms of reducing your R&D burden as well?

Jackson Hu

I do not wanted to comment on any specific names, and again I mentioned that earlier that we are evaluating different potential partners and with that they are over mind.

Unidentified Analyst

Okay. Thank you.

Operator

The next question is from Steven of HSBC in Hong Kong. Please go ahead Steve.

Steven Pelayo

Thank you. Just a quick on ASPs, I understand that on improving mix is driving a higher blended average ASP, but I am interested on your thoughts on like-for-like basis especially with what happened last year when utilization rates fell and now that they are declining again?

Jackson Hu

Are you referring to the seasonality fluctuation?

Steven Pelayo

Well I just know last year there was some fairly aggressive pricing that happened in the first half of the year as we were trying to deal with some of the access inventories. Now that I see shipments down double-digits in a couple of quarters, I figure that we do have some more access capacity here with declining utilization rates. What does that mean for like-for-like pricing and more on your trailing edge areas rather than just focusing on a mix richening to 65 and 90 nanometer?

Jackson Hu

Okay. I also mentioned that part of the purpose for this years CapEx spending is to improve the capacity mix for the material, we have an arguments there. Okay, so during the seasonal down turn sometimes we are lowering the prices that's not necessarily stimulate the demand. So you have to do that at a proper time, but we're actively seeking methods to address the seasonality fluctuation. So it's a little bit too early for me to comment exactly the order rates, hopefully in the future, but during the downturn low seasons that we can also improve the loading [ph].

Steven Pelayo

Okay. So can I just ask then in this type of environment obviously you guys are being disciplined with your CapEx plans, but it sounds like that you're also looking to be more disciplined in your pricing negotiations out there. Are you finding that your competitors are also maintaining the same discipline?

Jackson Hu

Not everyone, someone been with [ph].

Steven Pelayo

All right, fair enough. Thank you.

Operator

There are currently no more questions in the queue. [Operator Instructions]. Still, currently no questions in the queue. [Operator Instructions]. As there are no further questions, we'll now begin closing comments. Mr. Liu, please go ahead.

Chitung Liu

Thank you, Jerry. That concludes our call today, and thank you again for joining. If you have any further question please do not hesitate to contact us directly, and now back to you, operator.

Operator

Thank you for your participation in UMC's conference call. There will be a webcast and replay within one hour. Please visit www.umc.com, under the Investor Relation section. You may now disconnect. Good bye.