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Executives

Chitung Liu - Chief Financial Officer

Shih-Wei Sun - Chief Executive Officer

Analysts

Randy Abrams - Credit Suisse

Bill Lu - Morgan Stanley

Donald Lu - Goldman Sachs

United Microelectronics Corp. (UMC) Q1 2009 Earnings Call April 29, 2009 8:00 AM ET

Operator

Welcome everyone to UMC’s 2008 Q4 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 (Operator Instructions). For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our www.umc.com under the Investor Relations/Investor Events section.

I would like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin.

Chitung Liu

Thank you, operator and welcome everyone and thank you for joining our first quarter earnings conference call. We are hosting this conference call from Hsinchu and with me are Dr. Shih-Wei Sun, CEO of UMC; and Mr. Bowen Huang, Senior IR Manager.

During today’s conference call we will first review our financial results for the first quarter 2009 and then Dr. Sun will provide an update for our business and forward-looking guidance, followed lastly with a Q-&-A session.

Before beginning this presentation, I would like to remind everyone of our Safe Harbor policy. Certain business 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.

For the first quarter of 2009 revenue was NT$10.84 billion, representing a 41.5% quarter-over-quarter decrease from NT$18.54 billion in Q4 2008, and 54.8% year-over-year decrease from NT$34 billion in Q1, 2008. Gross profit for the quarter was NT$4.34 billion or 40% of revenue, compared to NT$0.8 billion or 4.3% of Q4 ‘08 revenue.

Operating loss was NT$7.32 billion or 67.5% of revenue compared to NT$3.88 billion or 0.9% of Q4 ‘08 revenue. Net loss was NT$8.16 billion in Q1 ’09 compared to NT$33.51 billion loss in Q4 2008. Loss per ordinary share for Q1 ’09 was NT$0.64 and loss for ADS was US$0.094.

UMC’s wafer shipment for the quarter dropped to 384,000 [ANG] program wafers with the transition rate to be approximately 30%. UMC also reported higher operating cost associated with the adoption of priority SFAS No.10 with a gross margin of a net 40%.

Despite these factors UMC remains financially solid in Q1 maintaining positive free cash flow of NT$2.18 billion and cash equivalent at NT$35.92 billion at the quarter end in Q1 2009. You can look for more details within the financial data that accompany our Press Release today.

Now let me turn the call over to Dr. Shiwei Sun and he will provide you with UMC’s business update and also this proposed acquisition of the holding of He Jian Technology in China during our Board of Director Meeting today.

Lastly the outlook for the second quarter of 2009.

Shiwei Sun

Thank you Chitung, hello everyone and welcome again to our conference call and thank you for joining us today, as always we appreciate your interests in UMC.

First of all I would like to touch base on the highlights and then provide further details on our performance and the key activities impacting our business.

Q1 2009 was challenging for UMC due to a sharp drop in customer demand influenced by the global economic downturn. However recent orders indicate strong demand for Q2, confirming our assessment from last quarter’s conference that demands had already bottomed out.

UMC expects Q2 revenue to go significantly with loss turning into profit. Moreover we are optimistic about our longer term prospect of the foundry industry and demand growth. As the economic uncertainties continue, we will closely watch our customers’ inventory consumption and market demands and introduction of new applications so that we can quickly respond to any status change when necessary.

With regard to UMC’s recent rush orders we will work diligently to meet urgent order delivery for these customers. However our mid to long term capacity plants including capacity conversion to a more favorable technology mix 45 and 40 nanometer RAM to 12-inch volume production requiring the most of the R&D equipment are all in progress and fully capable of satisfying our customers’ manufacturing requirements.

UMC’s advanced R&D efforts and equipment upgrades will proceed as planned despite economic uncertainties to continuously improve our long term competitiveness. For example we have already delivered the customers ICs manufactured on UMC’s independently developed high performance 40 nanometer processes. The large die sized program of a larger chip is being produced with excellent cycle time in years.

Many other customer 45 and 40 nanometer designs will enter pilot and verification stage later this year further contributing to UMCs financial performance when these designs enter volume production. Wirth regard to more advanced 20 nanometer process technology and with several customers involved in the current development stage we are progressing smoothly at UMCs R&D in Tainan. For this technology node, UMC will provide low power and high performance [party zion] and high-k/metal-gate process technologies to meet the performance and power needs of various applications.

Recently two global semiconductor companies, one from Taiwan and another from the US awarded UMC with honors of 2008 Best Stamp Award and 2008 Supplier Excellence Award respectively. These conditions underscore UMCs strategy of delivering customer driven foundry solutions to create a win-win situation for UMC and its customers.

Today UMC approved to propose the acquisition by UMC of the holding company for Hajian Technology. Board resolution had an annual shareholders Meeting. He Jian operates and * inch fab in Siojo in China with the capacity of 41,000 wafers per month. It was profitable from 2005 to 2007 and its operating performance and the financial condition remain promising.

During the past six months the global semiconductor market suffered from the major financial crisis that led a worldwide economic downturn. The net value and market value of many semiconductor companies were negatively impacted. Conversely China’s market was relatively strong this period attracting many customers that preferred the option of a local production. After considering the required manpower, capital and time to build a new fab which would exceed one year, UMC proposed the acquisition.

In addition to realizing the value of the 15% ownership interest in direct holding company of He Jian held in trust for UMC and promoting its shareholders interests. UMC could acquire fully built, fully staffed and fully operational production base at an attractive price. UMC further anticipates that by focusing on customer satisfaction, the strong foundation established by He Jian in China will lead to further gains in market share. However completion of the acquisition is still subject to approvals from governmental authorities, the passage of appropriate resolutions of the shareholders of UMC, and the holding company of He Jian and certain other customary conditions. After the completion of the acquisition, UMC will enhance its global competitiveness and expect to expand the potential to grow its long term revenue and earnings.

Okay let me provide the guidance for the second quarter of 2009. Wafer shipments to increase by more than 110%. Wafer ASP in US dollar to decrease by less than 5%. Capacity utilization rates approximately 75%. Profitability or gross profit margin to be approximately 20% positive. The communication segment is expected to be the strongest followed by the computer and the consumer segments. The 2009 CapEx budget will not exceed US$400 million.

That is all for my report. Now let us begin the Q-&-A session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Randy Abrams - Credit Suisse.

Randy Abrams - Credit Suisse

Yes that you. Could you talk about, given the 110% for the second quarter, maybe talk about outlook even beyond that? I know it is early but to think about beyond that, do you think customers are getting to the point that they are tracking consumption and do you expect continued growth off of the second quarter going into the second half?

Shiwei Sun

So for all of beyond Q2 we will report to you next time during our conference call, However we think Q2 revenue will be climbing month by month. As far as the customer situation is, the visibility for us is not very clear. We are very cautious, however we think Q2 revenue will grow month by month.

Randy Abrams - Credit Suisse

Okay and then maybe if you could characterize the 110% growth, how much do you think is coming from your existing customers coming back to order from inventory restocking? How much do you think if any is market share gains and then are you seeing any orders from concerns on availability just with the foundries coming back from a slow first quarter and maybe being slow to turn back on? Maybe talk about the elements for that real strong growth, where do you think it is coming from?

Shiwei Sun

I assume the latter part of the question, I think our observation from our customers is that they are all very much cautious and careful about their inventory level, As far as how much is from the inventory replenishment or others real consumer recovery and this is sustainable demand, it is hard for us to discern.

Randy Abrams - Credit Suisse

Okay and for the He Jian, with you announcing it today, are you getting any sense from the regulators if they are opening up a bit to allowing you to acquire the 15% stake and move ahead? Have you gotten anything from the regulators that they are loosening up a bit? If you could give a quick snapshot of He Jian, how much overlap of existing customers and applications and how much would be new for UMC?

Chitung Liu

Hi Randy this is Chitung. Basically what we are trying to do here is to go get the authority by our shareholder meeting’s approval then we can go to the government to study the whole application process and the completion of the acquisition is really subject to the government approval. For the time being unless we get the GM approval, the shareholder approval, it is really too early to talk about the government attitude on this issue. Certainly in our own judgment that the current government, in terms of their policy is certainly more favorable to further opening up of the rejection and that is part of the reason why we are willing to bring this proposal to the board and later on to the shareholder’s meeting.

As for He Jian’s current customer, we have little knowledge about it but as far as we know it is mostly Taiwanese and Chinese customers. We focused on driver IC as well as MP3 IC and that is all we know. We do not really see this too much overlap from our own judgment.

Randy Abrams - Credit Suisse

Okay and one final question for 40 nanometer and you talked about the POD starting production, could you talk about capacity or how much percent of your capacity you are putting in place for the 40 nanometer for this year and what is you expectation by the fourth quarter, how much 40 nanometer could be a percent of sales?

Chitung Liu

For 40 nanometer capacity in this afternoon’s conference call, we mentioned that we will increase their capacity actually by doubling the capacity. The range of capacity will be 5K to 10KAbout the revenue, also we mentioned that for this year we have engaged the over ten customers heavily involved on the pilot verification qualification stage. As far as the meaningful revenue it will probably be next year.

Operator

(Operator Instructions) Your next question comes from the line of Bill Lu –Morgan Stanley

Bill Lu –Morgan Stanley

A couple of questions on He Jian, I know that you said that are profitable but can you talk a little more about what their margin looks like or what the ROE looks like?

Chitung Liu

There quite a lot of figure and it will be difficult to show you the details now but basically they are making profits during the period of 2005 to 2007. They made a small loss last year because of the financial crisis especially in the second half. This year it looks like they are going to make an even bigger loss because Q1 just when we saw the semiconductors operating at a very low capacity utilization rate recovery in the second quarter.

What we are focusing on is really hard to get the synergy after the government approves the merger and we do see they have building marketing people, R&D people and a lot of supporting people and it will be immediate cost saving if He Jian was merged into the whole UMC platform. So we are actually quite keen on the potential synergy at the completion of the merger.

Bill Lu –Morgan Stanley

Thanks a lot and the second question is, if you look at the uptick in business in Q2, 110% increase in shipment, do you have a sense as to what portion of that is coming from demand in China. It seems like that is pretty big driver for a lot of the Pacific companies so not where your customers are based, but instead the end market of China, do you have any sense of that?

Chitung Liu

Based on our customers’ feedback, even for example, some US or other regions’ customers are also indicating some of their uptick business in China for example for the 3G infrastructure build up etc.

As far as exactly the quantitative distribution we do not have the numbers.

Operator

Your next question comes from Donald Lu - Goldman Sachs

Donald Lu –Goldman Sachs

The first question I have is - does UMC know how much of your revenues is consumed by the China market and also you commented He Jian, after the potential acquisition of He Jian, you will be better positioned to serve the China Market. Can you elaborate on the strategy? Are you going to develop more Chinese customers or offer some kind of low cost products or anything like that?

Chitung Liu

Donald I will answer you in a different way. I will give you a bunch of data to see if you can figure it out. Communication revenue is about a little bit shy of 50%, among that wireless is about 70% or 2/3 and wire line is 1/3. On the other hand we do have our largest customer each representing about a little bit more than 10% of our revenue. I think you can pretty much figure that out.

One more data point is the driver IC trend accounts for our 8% revenue. So if you kindly do a simple math you will probably have a ball park figures in terms of finally going to the Chinese market.

Donald Lu –Goldman Sachs

Really? I will have to call you after a couple of days if I can get an answer but thank you for the information. That is helpful. Would you have any, particularly to address the China, India and the low cost emerging markets?

Chitung Liu

In he China market we are definitely interested in mostly the local business. For example the Chinese system companies are thriving in this landscape of change during the global economic crisis. They are doing quite well especially with the stimulus program so hopefully if the He Jian case will go through well and have a much closer support and partnership with them then we will have a presence over there.

Secondly state-owned projects are very attractive also. For example the small car business metering, OED etc., so that is in general because we have not really started any discussion with them yet. It is just my general comments.

Donald Lu –Goldman Sachs

My second question is on the R&D side, I see your R&D has decreased very slightly in Q1 and also from last year. I mean going forward everyone is talking about the technology getting more expensive and also that the high end revenue probably is very hard to grow very much. How would UMC resolve this old issue in terms of generating profitability by going 32 nanometer?

Chitung Liu

From an R&D point of view our strategy does not change. We will continue our independent R&D efforts but the recent R&D revenue had some slight decrease mainly from asking the teams to work smarter. They should share their experiments with more carefully designed experiments etc. So that is just in efficiency enhancement.

Going forward I mentioned a little bit about our 40 nanometer high performance data. We are delivering samples to customers more volume production are picking up and engaging over ten customers. On the 28th we are designing both high-k/metal-gate process and even on the 22 we are sending people to Albany in New York joining the 22 nanometer development efforts with for example extreme EUV [sonography efforts 34:48]. At least we have a big momentum moving already. So it is quite self-sufficient we can see from the efforts. Also we mentioned the economic factor the node to node volume crossover will be tracked longer. So give us more time to make the technology available for customers and actually towards our advantage now.

Donald Lu –Goldman Sachs

Can you give some guidance for the operating expense and the pack and non-operating income in the second quarter?

Chitung Liu

For the tax, there will be tax expenses given that we are turning into operating profits in the second quarter so certainly we will see some kind of tax, not much, probably the minimum tax in the second quarter.

For operating side, we are for sure we will see some kind of investment loss through UMC Japan operations because they already announced they will probably will still be loss making in the second quarter so according to our ownership[p of 50%, we will still recognize some investment loss through the ownership of UMC Japan.

On the disposal side, we are watching the market closely to see if there is any change. We can sell some of our non-core assets or non-core investments which have some profits but I think is for your modeling point of view I would suggest try to get break even, it will probably be safer.

For operating sense of course our CEO, who is sitting right next to me has a very strict guidance which we have to follow internally to continue to drive the cost down especially on the operating expense side but just a reminder that we have stopped our unpaid leave practice since March and there is a lot of rush order coming in. There could be some overtime expenses but we will try our best to keep the operating expenses at a flattish level.

Donald Lu –Goldman Sachs

Thank you and my final question is on this potential new share influence for the He Jian acquisition. That would be after the potential acquisition being approved by the shareholder meeting and the government.

Chitung Liu

For the upcoming shareholders meeting we will have the merger case the He Jian to be approved by the AGM. There will also be a following agenda which is to issue new shares in order to do the merger also at the AGM.

So first of all pass the agenda first and following the application submitted to the government. If government approves then there will be new shares issued. I just want to share with you that if 100% of the He Jian shareholders choose to relax ADS the dilution rate will be roughly 4%. If 100% of them to choose Common then the dilution will be around 6% and in 2008 alone UMC has cancelled all our treasury shares by more than 6.5% and going forward I do not think it will be a surprise if UMC continues to practice share buyback and cancellations if our cash situation can support the package.

Operator

Your next question comes from Daniel Zhu - Lusight Research.

Daniel Zhu - Lusight Research

Hi, my first question is for the Q2 110% increase in shipment, is it concentrated in certain market segments or technology nodes?

Chitung Liu

No actually it is across the board. It is quite evenly distributed.

Daniel Zhu - Lusight Research

It looks like from Q4 to Q1 communications segment declined faster than consumer segment; can you elaborate a little bit more? Which products are mainly affected?

Chitung Liu

Probably that is related to the general landscape shift, for example China’s stimulus program are more geared towards the consumer segment and communication because of the economic downturn seems just got hit worst than the consumer segment especially from Asia and China.

Operator

(Operator Instructions) At this time there are no further questions.

Chitung Liu

So if there are no more questions we will conclude our call today. Thank you for joining us and if you have any additional questions please do not hesitate to contact us directly. Operator back to you.

Operator

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!

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Source: United Microelectronics Corp. Q1 2009 Earnings Call Transcript
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