UMC 联华电子

Operator

Welcome everyone to UMC’s 2012 First Quarter Earnings Conference Call. (Operator Instructions) For your information, this conference is now being broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website at www.umc.com under the Investor Relations Investor Events section. I would now like to introduce Mr. Bowen Huang, Head of Investor Relations at UMC. Mr. Huang, you may begin.

Bowen Huang

Thank you and welcome to UMC's conference call for the first quarter of 2012. With me today is the CEO of UMC, Dr. Shih-Wei Sun; and the CFO, Mr. Chitung Liu. During this conference, we may make forward-looking statements based on management’s current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control. For these risks, please refer to UMC's filing with the SEC in the U.S. and at ROC Securities Authorities. I'd now like to introduce UMC's CFO, Mr. Chitung Liu, to explain UMC's Q1 2012 business results.

Chitung Liu

Thank you, Bowen. For the first quarter of 2012, revenue was NT$23.77 billion, a 2.7% quarter-over-quarter decrease from NT$24.43 billion in Q4 2011 and 15.5% year-over-year decrease from NT$28.12 billion in first quarter of 2011. Gross margin this quarter was 19.1%, operating margin was 5.6%, and net income was NT$1.34 billion and earnings per ordinary shares were NT$0.11. Above is the short summary of UMC's results for Q1, 2012. More details are available in the report, which has been posted on our website. I would now turn the call over to Dr. Sun.

Shih

Thanks, Chitung. Good morning, good afternoon and good evening, ladies and gentlemen. In Q1 2012, UMC saw profitability and the revenue exceeded our expectations. Wafer shipments reached 963,000 8-inch equivalent wafers bringing overall capacity utilization to 71%. Revenue contribution from 40-nanometer increased to 9%. For the second quarter we would expect the wafer shipments to increase 15% as communication and the consumer IC demand grows. This projected growth reconfirms that the economic cycle trough seen in the first quarter signaled that the semiconductor industry saw multi-quarter inventory correction has subsided. UMC is progressing smoothly on our advanced 28-nanometer process technology. We have successfully delivered the 28-nanometer flagship product samples to mobile communication and computing customers with additional product tape outs during last quarter. We remained on track to enter volume production for UMC 28-nanometer process in the second half of the 2012, meanwhile to effectively utilize the existing 65 and the 90-nanometer capacity. We are developing numerous specialty technologies to deliver more diversified and the comprehensive customer foundry solutions for the future. We are optimistic about the semiconductor industries’ long term development. To solidify UMC’s profitability and business growth we will continue to follow the customer-driven foundry solutions philosophy that involves internal technology R&D to fulfill customer needs. Moreover, we are actively building sufficient capacity for 28-nanometer technology and believe that this node will enhance UMC’s customer and the product meets average selling price and profitability once volume production begins. In the meantime, the board of directors have proposed for shareholder’s approval of 2011 cash dividend payout of NT$0.5 per share. The resolution would maintain a 60% cash dividend payout ratio even after the ECS aggressive capacity expansion plans. Looking ahead into next quarter, our consistent efforts would be directed towards timely management of customers advancing the capacity needs and completing all necessary 28-nanometer preparation for volume production in order to maximize benefits to customers and the UMC. Now, let me provide you with the guidance for the second quarter of 2012. Wafer shipments increased approximately 15%. Wafer ASP in US dollars will remain flat from previous quarter. Gross margin low 20% range. Capacity utilization low 80% range. The communication in the consumer segments will outpace computer segments. That concludes my comments, we are now ready for questions. Operator, please open the lines up, thanks.

Operator

(Operator Instructions) Your first question comes from the line of Randy Abrams of Credit Suisse.

Randy Abrams

Yes, thank you. Good evening. I wanted to follow up on a point you mentioned this afternoon where you talked about having a bit more capacity on 28-nanometer above the 5%, I think you are targeting for revenue on 28. Could you talk about how much business you could support for 28 based on that CapEx you are targeting to 28 and potential to pull in any additional business for 28 this year?

Shih

So, the only thing I can share with you that we are providing sufficient capacity to support the 5% revenue percentage by the end of the year, for the exact capacity number I cannot share with you at this moment.

Randy Abrams

Okay, fair enough. And on the 40-nanometer, I think you mentioned the mix would be because all nodes are ramping 40-nanometer will still be about flat at about 9% of sales in second quarter. Could you talk about the applications coming in that may drive it toward, I think your target is 15% by year end, the type of applications coming in on 40?

Shih

40-nanometer, as I mentioned in the afternoon, we have an over 80 tape outs covering all 3C applications, certainly the leading communication hard disc drive, baseband application processor, almost everything. It is very typical for the foundry to grow this into a serious node.

Randy Abrams

Okay. And on the 28-nanometer, I wanted to see your confidence on indications you are getting from your customers, how committed they are to ramp up your 28 process? I guess the take it sounds like TSMC is going to raise CapEx significantly, but just the indications you are getting instill confidence to the business coming through it if TSMC’s gets more aggressive on their additions.

Shih

I think for the 28-nanometer engagement with customers is our serious long term engagement. Certainly, we at UMC I mean has to earn all business. So, we are working very hard diligently working with these customers, but these engagements are not as I mentioned earlier. It is very difficult to become a stock market kind of an engagement. We are very serious from both sides in the future investment from them and from us. The progress is so far on-track, but it is a very challenging, but we are working very hard to earn their business.

Randy Abrams

Okay. I appreciate on that. And final question I have is on the board I think renewed the private placement plan which I think 2 years ago you had the potential to look for strategic investor. If you could clarify do you have any interest in the equity fund raising or is it more –your going to target just at fund raising as you look forward to fund the CapEx?

Shih

Well, it is really looking for strategic partners more than anything else. So, if it’s not really strategic by say the perception by the investment community we will not do it. So, it is definitely not for the purpose of fund raising.

Randy Abrams

Okay. Thanks a lot guys.

Shih

Thank you.

Operator

Your next question comes from the line of Mehdi Hosseini of Susquehanna International.

Mehdi Hosseini

Yes. Thanks. Mehdi Hosseini, Susquehanna International. Going back to your customer engagement on 28-nanometer, there are different types of 20-nanometer process technology and with volume capacity not available until second half, how are you going to be able to convince customers that your recipe is going to be adequate for different customer’s requirement especially when customers are looking for a second source.

Shih

I mentioned in the afternoon conference call during the past quarter we have delivered thousands of functional engineering samples 28-nanometer node to multiple customers including Mobile Communication and the Mobile Computing.

Mehdi Hosseini

Okay. And these are all based on the 28-nanometer Poly SiON right?

Shih

Different versions and also I mentioned in the afternoon, we will have a 28-nanometer High K/Metal gate also gateless because UMC is one of the few offering gate last a High K/Metal gate so we have a customer products, product tapping out in December time in High K/Metal gate.

Mehdi Hosseini

Well, I guess what I am trying to figure out is foundries in Taiwan are based on gate last, other foundries are based on the gate first 28-nanometer. So, are we going to just wait for customers to figure out how they are going to perform to figure out differences or is there any difference that we need to monitor as competitors outside of Taiwan ramp significantly.

Shih

I think gate last will be the only version for process at 20-nanometer node, so it gives us a good advantage. We got used to the gate last at 28-nanometer then we can easily migrate that into 20-nanometer offering. As far as the gate-first, they have a different category of customers, they are also doing fine. All these are new advanced technology, takes a long time to engage. If you work hard enough, they would work out well.

Mehdi Hosseini

Okay. So, it is just a matter of fine tuning for a specific product and a specific customer to make sure that the yields are reasonable and also functional performance is adequate.

Shih

Sure. Different choices.

Mehdi Hosseini

Okay. And then at what point are you going to accelerate your R&D for 20-nanometer?

Shih

20-nanometer actually, today we have a two big partners, so other than actually today most of our R&D efforts are towards 20-nanometer. 28-nanometer is already on the yielding enhancement stage now. So, it is a (inaudible) to us. So, we are heavily on 20, so 20 is not only as I mentioned earlier, not only gate-last it is also high K last. Also, we are going to use the slow contact, double patterning and source-mask or optimization. So, a lot of the things are ongoing, so the progress is pretty good.

Mehdi Hosseini

Would you have a pilot line available by some time in the second half of next year?

Shih

No, it is already existing in 12-inch 20-nanometer.

Mehdi Hosseini

For 20-nanometer? Okay. So, let me rephrase my question.

Shih

It is a R&D line, it is a R&D line, yeah.

Mehdi Hosseini

Would capacity be available second half of next year or is that more of 2014?

Shih

We haven’t planned that yet, we are focusing on the development at this point of time.

Mehdi Hosseini

Got it, okay. Thank you so much.

Shih

Thank you.

Operator

Your next question comes from the line of Robert Lea of Jefferies.

Robert Lea

Okay, thanks, for taking my question, just getting back to the 40 nanometer, I just want to confirm what you did say in this afternoon’s conference. So as a percentage of sales 40 is going to be roughly or remain flat at 9% in Q2, is that what you said? And also did you provide any updated guidance for 40 nanometer by the end of the year?

Shih

I think, I said that for Q2 40 nanometer will also grow.

Robert Lea

Okay, in absolute revenue –

Shih

In absolute revenue number, but as a ratio of our revenue with everything Q2 is going up pretty strong. So, as the ratio of our revenue at this moment I think is about the same and I don’t have the exact numbers. As far as the year end the internal target is 15% of our revenue, it is still our internal target.

Robert Lea

Okay and given this node has been in production for about 2 years now, I guess, have you seen any change in the appetite for customers for 40 nanometer, I suppose particularly given the very strong demand for 28 at the moment? Are there any signs on some customers actually looking to differ from going to 40 and sort of effectively skipping the node and going straight to 28, do you think that is a relevant factor at play here?

Shih

Yeah, certain customers, it is very typical every node, if you are a late comer the design, investment, and infrastructure setup are so expensive, so if you are little late and you see the next node is getting more mature, especially we have a 28 nanometer Poly-SiON node, process wise is very similar or consistent with 40 nanometer high performance process. So certain customer may select to jump nodes, it is happening, but it depends on the application, so it would be still be a very strong node.

Robert Lea

Does that leave you exposed financially at all given the sort of R&D investment and CapEx investment you have put into 40 or is that possible to just sort of update that and upgrade that straight to 28?

Shih

Actually, as I mentioned earlier it is a (inaudible) like the 40 nanometer high performance process, having the silicon germanium we just carry over to the 20 nanometer low power, so for us it is a continuous effort. As far as the capacity arrangement it is, now we need to be very careful how to optimize the best profile from customers and product mix. You are right, indeed this technology now is already moving very fast.

Robert Lea

Sure, can I ask you different question, just on the gross margins in the first quarter, because clearly they came in a bit better than originally expected and so trying to work backwards, it appears that the non-depreciation cost per wafer was actually a bit better than expected and you saw some considerable cost savings on that front, I just wanted to know if you agreed with that and if so what drove down that non-depreciation cost per wafer? Was there some exercise or was it mix related or what really drove the better margin there?

Chitung Liu

I think it is a bit of everything and other than the lower depreciation expenses in Q1, the non-depreciation cost is coming down because of our internal cost down effort and overall the volume in quarter two pick up significantly and that share part of the fiscal[ph] in Q1, so they also contribute, some of them better than originally expected gross margin.

Robert Lea

Okay, so what extent does you product mix also play a part in the gross margins, because when you look at communications as a percentage of sales, obviously that came down from about 60% to 49%, now I guess some of that is seasonality, but I guess given that a lot of your communication customers have greater exposure to feature phones and which is a sector that is suffering quite a lot of margin pressure at the moment, would you agree with the point that lower communication sales is actually beneficial to your margin, is that relevant at all?

Chitung Liu

No, we don’t think that is relevant, I think you are still coming down the blended (inaudible) our cost down effort.

Robert Lea

Okay and one final question, with the resolutions, the board resolutions passed on the potential equity and debt issuance, can you just confirm – are you just at ease[ph] completely new plans and new resolutions or are you just updating prior authorizations on both behalf? Is this just a rollover of the authorization?

Chitung Liu

For the straight[ph] on issuance is new, we haven’t really issue corporate bonds in over the last 10 years and interest rate is actually pretty attractive right now in Taiwan based upon NT dollars, so we want to tap into the market to fill the gap for cash flow of this year and to some extent also prepare for the CapEx next year as well. As for the strategic investor, it is really just to getting our option open and get the red tapes done at the AGM. And UMC has been talking to potential strategic investors all along for the last few years and we will only do the private placement to strategic investor if majority of the investor perceive or agree it is strategic. So, we have very high standard in terms of our potential strategic investor targets.

Robert Lea

Okay and one final question if I may, what sorts of visibility do you have into the third quarter currently? And, what are your thoughts on the third quarter? Will we see normal seasonality coming through?

Shih

At this moment, we don’t have guidance for third quarter, but if you look at our foundry, historically Q3 is foundry’s hot season. So, but as far as the guidance let us wait for the next quarter.

Robert Lea

Yeah, because I guess, I mean on the macro front, I am depending on which area of the world you look in, there is still lot pressures in Europe and obviously China is slowing down, although the US has showed some signs of improvement. So it still seems to be quite an uncertain environment out there, I just wondered what your customers were seeing or what your thoughts were on that?

Shih

Your assessments is consistent, but our customer, -- again Q3 number we will have to give you the guidance the next quarter.

Robert Lea

Okay, alright thanks very much.

Shih

Thank you.

Operator

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

Donald Lu

Hi, Dr. Sun and Chitung, good evening. My first question is on 28 nanometer, you have commented you have delivered the first silicon to the customers, can you comment on the potential yield? And also, if by the end of the year you ramp up 28 nanometer, do you think that part of the revenue will be -- when will that part of the revenue be a margin accretive with the yield curve improvement etcetera? So that is my first question on 28. The second question on 28 is, Qualcomm[ph] has recently, in the last earnings have highlighted this severe shortage of 28 nanometer, but also commented that it is trying to potentially change the business model with foundry partners a little bit. So, have you seen any change from the way you are working with customers? For example, in terms of more strategic collaboration, more technology, process transfer those kind of things? Thank you.

Shih

For the first one the 28 nanometer yield, I cannot give you the year number, but I mentioned in the afternoon, our (inaudible) pretty good I think there, so we are spending lots of efforts working on the software[ph], which means the voltage dependent or testing of our process device and circuit matching kind of yield improvement, so we are at that stage. So, we are working closely with customers on those challenges together. It is a very difficult and challenging node. Also you mentioned margin accretive, since we believe if we can run our business timely, especially at this node you mentioned we also heard there was shortage on the additional, we believe it should be, we expect it should be margin accretive if we can deliver on our business timely. For the second question, we are not going to make any comment on specific customer. But our 28 nanometer engagement is pretty exciting. We are having both technologies, one is the Poly-SiON the second one is High-K metal gate. The foundry can really deliver these technologies with adequate capacity and the service kind of limit. So we would like to grab this great opportunity to provide our best service to our customers.

Donald Lu

Okay, great thank you.

Shih

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Mahesh Sanganeria of RBC Capital Markets

Mahesh Sanganeria

Thank you very much, I have a question on 28 and 22 nanometer, can you talk about how many double pattering steps are required for 28 and 20 nanometer and how the costs is increasing as you move from 40 to 28 to 22, I would assume that go cost is going up pretty significantly, if you describe in terms of capital cost for 10,000 wafer capacity?

Shih

So, for the 20 nanometer double pattering, all the metal layers required double patterning, all the metal and the rear[ph] layers. So, that is many layers or the key patterning needs double patterning and the certainty (inaudible) and applications, even the active layer needs double patterning. So many layers needs double patterning. In terms of cost, I guess I can give you a rough, my personal opinion from to 28 to 20 the investment, the capital, I guess 50% more, should be a rough some number. So it is very expensive.

Mahesh Sanganeria

Okay, so if you say there is that many double patterning and that the overlay requirement is going to be of course very demanding and that will mean lot reworking, what do you think the yield that you can achieve? I would think that the yield you can achieve with that kind of complication is going to be small even when the process mature and so I am wondering do you think that you can get the return on investment on that kind of complicated process technology?

Shih

As far as the yield, the market propulsions[ph] you talk about the overlay, that that’s why you need to buy the latest immersion scanners from the vendor, they have much better overlay. They produce these scanners just for the purpose of a double patterning. As far as the investment, so everybody needs to do business with a reasonable profit, so the supply chain how we divide profit and share the burden it is definitely a industry challenge together. So I agree with you, it is a challenge. But I think by the time we are getting there, so collectively we should find some solution together.

Mahesh Sanganeria

Okay, thank you very much.

Shih

Thank you.

Operator

And your next question comes is a follow-up from the line of Donald Lu of Goldman Sachs.

Donald Lu

Hi, a follow-up question old[ph] packs, I think in the afternoon may be you mentioned old packs might increase during the year, can you give us more color on the magnitude and where it will be increased from R&D, SG&A, etcetera? Thank you.

Chitung Liu

For the time being we are expecting 15% wafer (inaudible) growth in the second quarter and we do expect the related costing in the operating expenditures to likely to grow somewhat in line with our top line. So, the percentage of revenue, it should stage some of that but in absolute dollar terms we do expect to see some growth in the operating expenditures.

Donald Lu

Okay and how about for the full year, this seems to be a little bit more and more difficult to go 20 nanometer, will R&D potentially increase over the next 12 months?

Shih

It would be difficult to comment on the longer term trend, but at least for the near-term foreseeable future, we will try to control our R&D budget within certain range.

Donald Lu

Great, thank you.

Operator

You have a follow-up from the line of Mehdi Hosseini of Susquehanna.

Mehdi Hosseini

Yes. I just want clarification for your 28-nanometer low-power. Does it still use a metal gate?

Shih

Low-power, most of the low – we have different versions of low-power. Most of the low-power are Poly-SiON. Specific customer do choose a different version of our High-k metal gate, but there are so many, but majority are Poly-SiON.

Mehdi Hosseini

Okay. So, the difference of a recipe is more on the High-k metal gate, but in the low-power Ploy SiON, there seems to be fewer recipes. Is that correct?

Shih

Not really. Even, Poly-SiON, we have so many varieties.

Mehdi Hosseini

Okay. Got it, got it. Thank you.

Shih

Yes, sure.

Operator

Your next question comes from the line of C.J. Muse of Barclays.

C.J. Muse

Yes, good evening. Thank you for taking my questions. I guess another question on 28-nanometer. Considering the yields there are fairly similar to 40-nanometer on Poly-SiON, I am curious why the industry is seeing shortage at 28-nanometer. Is it that customers are skipping 40-nanometer and going right to 28-nanometer initially using Poly-SiON, or is there some transition going on, on the end demand side, particularly for handsets that’s causing this shift? Any color or thoughts from you would be very much appreciated?

Shih

First of all, Poly-SiON 28 doesn’t mean that yield is as good as Poly-SiON 40. Their shrinkage and different challenges and the requirements, so they are different, first of all. As far as the shortage, I really cannot make much comment at this moment. (inaudible) issue at this moment.

C.J. Muse

Okay, thank you.

Shih

Thank you.

Operator

Your next question comes from the line of Satya Kumar of Credit Suisse.

Satya Kumar

Yes, hi, thanks for taking my question. I was wondering if you could give a breakdown of the CapEx mix in 2012 between, I think upgrading your old 65-nanometer and adding new capacity at 28-nanometer, and investments on 20-nanometer? And how should we think about the mix that we look into next year?

Shih

Yes, for our CapEx, I think over 20% of our CapEx is out for capacity conversion. The other separations are, we spent 97% at 12-inch capacity, 3% for 8-inch upgrades.

Satya Kumar

And how about, on the CapEx between 28 and 20?

Shih

20 are R&D expenses. They are around 6% or 7%, I guess of our CapEx.

Satya Kumar

All right. And just a quick follow-up, I think to an earlier question, you said that the double patterning is on all metal layers and you mentioned a few things. Would you be able to quantify how many layers that is? And I just wanted to confirm that, that double patterning is on 20-nanometer and not 28-nanometer,

Shih

It’s only for 20-nanometer. 28-nanometer is no double pattern.

Satya Kumar

Yes, how many layers is that?

Shih

Every customer has different macro layers. So, it depends, yes, maybe from five to 12, six to 12 layers.

Satya Kumar

Six to 12 layers of metal or six to 12 layers of double patterning?

Shih

Six to – it depends on customer’s application, maybe some customer uses six layers, some use 12 layers of metal. It’s just an example, yes.

Satya Kumar

All right. Okay, thank you.

Shih

Thank you.

Operator

I would now like to turn the call back over to management for closing remarks.

Chitung Liu

Thank you for joining us today, and thank you again for your interest. Please feel free to contact us directly if you have any additional questions. Operator, back to you for the closing remarks.