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Executives

Chitung Liu - CFO

Shiwei Sun - CEO, Director

Analysts

Donald Lu - Goldman Sachs

Visva Louie (ph) - Credit Suisse

Dan Malkan (ph) - Moore Capital (ph)

Arthur Cho (ph) - AllianceBernstein

Quinn Bolton - Needham & Company

Bill Lu - Morgan Stanley

Presentation

United Microelectronics Corp (UMC) Q3 2009 Earnings Call October 28, 2009 8:00 AM ET

Operator

Welcome everyone to UMC's 2009 Q3 earnings conference call. (Operator's Instructions) This conference call is now being broadcast live over the Internet. Webcast replay will be available within one hour after the conference is finished. Please visit our website, www.umc.com under the investor relations investor events section. I would like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin.

Chitung Liu

Thank you, operator and welcome, everyone, for joining our third quarter conference call. With me today are the CEO of UMC, Dr. Shiwei Sun and Bowen Yan, Senior IR Manager. Before beginning this conference call I would like to remind everyone of our safe harbor policy. Certain statements made during the call or as part 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 filing with the SEC in the US and the ROC security authorities.

Now let me begin with the third quarter financial results. For the third quarter of 2009, wafer shipment rose to 1,017,000 8-inch equivalent wafers with utilization rate rising to 89%. Revenue increased 21.1% quarter over quarter to 27.41% to (inaudible) billion from $22.6 billion NT in quarter two, 2009, an increase of 10.7% year over year from $24.75 NT billion in the third quarter of 2008.

Gross profit margin was 27.9% with operating margin of 15.4%. Net income in third quarter '09 was $6.09 billion NT with earnings per ordinary shares of 0.48 NT earnings per ADS was $0.075.

Above is a short summary of the results in Q3 '09, more details are available now in the quarterly report which has been posted on our website. Now Dr. Sun will provide you with an update of our business and the guidance for the fourth quarter of 2009.

Shiwei Sun

Thank you Chitung and thank you everyone for joining us today. We appreciate your interest in UMC. As usual I will start with a quick overview of the past quarter and then I will provide you with the guidance for the fourth quarter of 2009 before we move into the Q&A session. The positive momentum we experienced in Q2 carried over into Q3. Shipments surpassed 1 million wafers, rising to 1,017,000 8-inch equivalent wafers, the second highest number in UMC history.

Revenue for Q3 was the highest it has been for the past seven quarters while gross profit margin increased to the highest level in five years. UMC is optimistic about the fourth quarter and expects ASP to rise as our product mix continues to improve. However, factors such as a seasonal adjustment and appreciation of the NT dollar maybe slightly impact our revenue in Q4. As a whole, UMC expects continued profitability from our foundry business and will be overall profitable for the year 2009. Moreover, UMC intends to distribute dividends and employee bonuses next year.

Demands to process notes continued to rise in the third quarter. Revenue from 65 nm and below technologies grew by more than 40% in Q3 over Q2 with further growth anticipated in Q4. Continuing with our customer driven foundry solutions commitment, UMC is expanding 65 and 55 nm capacity and our 300 mm Fab 12i and enabling the Fab for 45 and 40 nm production capabilities.

This project will increase Fab 12i's capacity by over 30% to better service customers' demands for leading edge technology. It will also allow them to mitigate geographical risks through diversification of manufacturing locations.

In addition, UMC plans to substantially increase 2010 CapEx for 45 and 40 nm production capacity and will continue the 20 nm R&D equipment procurement at Fab 12A. Furthermore, construction of Fab 12A's Phase III and Phase IV Fab complex has been completed and we are currently implementing a clean-room related support facility.

These 300 mm efforts will further expand our capacity and market share being advanced in notes so that we may pursue stable long-term growth while increasing profitability and shareholders' return on equity.

Today, both UMC and UMC Japan or UMCJ board of director meetings approved UMC's tender offer of UMCJ's all outstanding sales shares listed. UMC currently holds 50.09% of issued shares of UMCJ. Through the tender offer, UMC intends to acquire 100% stakes of UMCJ. Upon completion, UMCJ will be fully owned by UMC and then be delisted from JASDAQ. UMCJ, the sole dedicated foundry company in Japan has been focusing on the Japanese market for many years and already established a great partnership with local customers.

UMC considers the Tender Offer to be beneficial to UMCJ's customers as well as it is expected to enable UMCJ's utilization of UMC's competitive production capabilities. We believe this merger will help UMC achieve improved synergy and economies of scale to provide customers with more integrated and competitive foundry solutions on a global basis. We also view the tender offer as a strategy to maximize the overall corporate value of the UMC group.

Now let me provide you with the guidance for the fourth quarter of 2009. We expect wafer shipments to decrease by approximately 0%-3%. Wafer ASP will rise by approximately 0%-3% in US dollar terms, however, appreciation for the NT dollar may have an adverse effect on revenue and profits. Capacity utilization rates will be in the mid 80s range.

In terms of our profitability, our gross margin will be in the mid 20s range. The consumer segment is expected to grow modestly while the computer segment is expected to show some weakness. The CapEx budget for 2009 remains at our previously announced $500 million. That concludes my comments. We will now take your questions. Thank you.

Chitung Liu

Operator, please give the Q&A instructions. Thank you.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from Donald Lu with Goldman Sachs.

Donald Lu - Goldman Sachs

Hi, good evening. My first question is on UMCJ, can you give us an update on the potential purchasing price and also in terms of price (inaudible), for example, and also the profitability of UMCJ in Q3 and Q4 this year?

Chitung Liu

Yes. Our tender of our price is 12,500 Japanese yen per share, this in comparison to the book value roughly is about 29,000 Japanese yen per share. Our Tender Officer price is about 0.45 times to the book and in terms of the book about 15,000 is actually in the form of cash, and the total amount if the 100% of the outstanding is tendered, UMC will pay up to 6.9 billion Japanese yen and the company had a big write down in asset value about a couple of months ago and now their operating position is improving with third quarter results being announced today as well. Their operating loss is about 500 million Japanese yen and their net loss is about 280 million Japanese yen.

And going forward we will take some time to try to generate as much synergy as possible. And we don't have an overall outlook for Q4 yet, and UMCJ being a listed company, so far they still have their full year forecast. You can refer to their IR website please.

Donald Lu - Goldman Sachs

Okay, thanks. My second question is in terms of the demand outlook. I didn't get it completely with your comment on which sector is (inaudible) in Q4. And also, in terms of 8 to 12-inch, does the 12-inch booking remain very solid utilization at 100% into January or not?

Chitung Liu

Donald, in Q4 we were guiding consumer sector as stronger and I also mention that the computer sector is showing some weakness. Communication sector is about flat.

And the second question is about — sorry, Donald, what's the second question?

Donald Lu - Goldman Sachs

Oh, I'm sorry. My second question is we have been hearing the 12-inch loading has been tight, so maybe give us color on 12 and 8-inch utilization.

Chitung Liu

Yeah. Moving into Q4 I think our 12-inch is still quite busy and quite tight, stronger than 8-inch.

Donald Lu - Goldman Sachs

Okay. Is 12-inch utilization in the 90% range?

Chitung Liu

Yes.

Donald Lu - Goldman Sachs

Okay, great. Thank you very much.

Operator

(Operator's Instructions) You have a question from the line of Sacha Kumar with Credit Suisse.

Visva Louie - Credit Suisse

Hi. This is Visva Louie for Sacha. You indicated that CapEx and (inaudible) could be substantially higher — could be for capacity increase for Fab 12A Phase III/IV and also for Fab 12i. Can you just give us an idea about what you are thinking about CapEx growth year over year here?

Shiwei Sun

So for next year’s CapEx, we will report a number in the next quarter's conference call. However, our long-term guidance for CapEx versus CapEx to sales ratio is 20%-25% in the long run. Since 2008 we have been under spending quite a bit and so we are in a catch up mode from now to 2010. The exact number will be provided at the next conference call.

In terms of the expansion of capacity, 12i, which is our Singapore 12-inch Fab, we mention in our press release we will increase capacity by more than 30% over there roughly from 31K to today to 41K next year including both 65, 55, and the 45, and 40 nm capabilities and capacities.

And also 12A we are certain moving forward on the 45/40 expansion, also 20 nm technology bites. Our Phase III/IV of the construction for the building has been completed. We are working on the clean-room related support facilities at this moment.

Visva Louie - Credit Suisse

So for 2010 you would expect — can you give any idea of what (inaudible) CapEx linearity is going to be first half versus second half?

Shiwei Sun

We don't have that exact number. Next time we'll provide those details.

Sacha Kumar - Credit Suisse

Okay. Thank you very much.

Operator

Your next question comes from Dan Malkan (ph) from Moore Capital (ph).

Dan Malkan - Moore Capital

Hi, yeah. Just on the computer segment that you talked about weakness there, what is driving the weakness in computer? And are you expecting that computer will be down sequentially in the fourth quarter?

Shiwei Sun

Computer is — it depends on the definition of the computer. For us, computer segment is showing some weakness mainly on the driver IC segment.

Dan Malkan - Moore Capital

Okay, driver IC for IT monitors?

Shiwei Sun

TV, monitors — TV is actually relatively better than monitor.

Dan Malkan - Moore Capital

Okay, but is TV in consumer or computer?

Shiwei Sun

Computer. The driver IC is in computer.

Dan Malkan - Moore Capital

Driver IC is part of computer, okay great.

Shiwei Sun

There are many products for TVs, but driver is for computer segment.

Dan Malkan - Moore Capital

Understood. And then what is driving the consumer strength for you guys?

Shiwei Sun

For example, set-top box, DTV, flash controller, et cetera.

Dan Malkan - Moore Capital

Okay, great. Thanks so much.

Operator

Your next question comes from Arthur Cho (ph) with AllianceBernstein.

Arthur Cho - AllianceBernstein

More color on the progress of 45 into next year, are you seeing acceleration or pretty much the same as in terms of your prospects for 45 versus say, say months ago?

Shiwei Sun

45/40 in the past quarter Q3 we shipped thousands of our 40 nm wafers. Looking to the future, (inaudible) yeah, we are very busy. We are engaging over 10 customers, very busy on the IP verification, qualification, and product level. Also we are running shadow programs. So we expect next year will be a busy year for 45/40.

But in terms of a crossover, earlier you know there was 65/55, it may take some time.

Arthur Cho - AllianceBernstein

And you say you should commercial production for at least half of those 10 customers you talked about maybe by the second half of next year?

Shiwei Sun

It depends. Every customer's progress is different. It is not only the 45/40, it is a complicated process and design process managing and collaboration, but next year we will — I think 45/40 will be ramping up. And at this moment we are ramping 40 for a few customers already.

Arthur Cho - AllianceBernstein

Okay. Thank you very much.

Operator

Your next question comes from Quinn Bolton with- Needham & Company.

Quinn Bolton - Needham & Company

I had two questions; first, wondering if you’ve seen any significant wafer start cancellations or reductions in forecast from your customers? And then the second question, was wondering what your wafer bank inventory levels are doing? Are your customers asking you to hold greater levels of wafer bank inventory over the last month or so? Thank you.

Shiwei Sun

For both questions the answer is no. We do not see any cancellations. For us there is almost no banking at all at this moment.

Quinn Bolton - Needham & Company

Okay, great. Thank you.

Operator

Your next question comes from Donald Lu with Goldman Sachs.

Donald Lu - Goldman Sachs

I have a followup question on CapEx and capacity. In this year, based on your statement in the press release, your overall capacity essentially remained flat in Q1 and Q4 with a $500 million CapEx. So can you explain where the CapEx has been applied to? And also, with your (inaudible) clean-room buildup, what kind of a (inaudible) CapEx would have by the end of next year?

Shiwei Sun

So the first question, the $50 million, most of the CapEx is happening in the second half of the year and it is cash based CapEx. So we say equipment lead time, everything. Also, the equipment will be released for production next year and that is probably why you see the difference.

On the second question about the exact number of CapEx, we will provide that to you next quarter.

Donald Lu - Goldman Sachs

So with the treatment you installed in the second half, what would be the capacity? Is that the treatment is in 12i or 12A? What kind of capacity has been (inaudible)?

Shiwei Sun

Oh okay. For the capacity profile we include many areas, 12i certainly we are expanding, 12A, I mentioned earlier 40/45 nm, 28 nm technology and even some 8-inch we are kind of aggressively expanding in specialty technology areas so it is a mixture of many things.

Donald Lu - Goldman Sachs

I guess what I am trying to get to is the CapEx intensity for each 1K wafer per month capacity at 65, 45, or 28, what would be the CapEx intensity?

Shiwei Sun

You mean the per K dollar amount or?

Donald Lu - Goldman Sachs

Yes. How much is that going to increase significantly or is that not the case?

Shiwei Sun

Yes. From 65 to 45 it will increase and it also depends on the process. If, for example, in the low power process other than the emerging scanner, the increase is less, but for the high performance 40 nm you are adding for the transistor enhancement like the (inaudible) laser and there is more. So it is different case by case, but that is why you are right, we tried to maximize the capital efficiency so try to have the better overlap between the two notes so we can have a better continuity in the long run. But as far as the exact dollar amount, I do not have an exact number with me.

Donald Lu - Goldman Sachs

Hmm, will you say the CapEx intensity increases more in the 10% or 20% range — is there a rough range?

Shiwei Sun

Probably somewhere in between — at least it is getting more expensive, that is for sure. Also, it is a function of if you are building a (inaudible) it is very, very expensive. But if you are continuing doing the technology mix, the migration and conversion with existing built-up economics of scale, then it is much less so it is quite different. But we are certainly on the latter part.

Donald Lu - Goldman Sachs

I see, great. And for your 12-inch Fab, I think over the years the return has not been that great, but going forward with the new improved technology, et cetera is there a target for end of next year at a fully loaded basis? At 100% (inaudible) for, example, with the 12-inch are we going to improve for a certain level?

Shiwei Sun

Certainly at the end of the year we are doing the business climbing — that is our target, to improve the 12-inch ROE. In the past it is not — we are going to improve the ROE from a certain number to a better target. That is for sure.

And also I would like to point out that the depreciation at our first 12-inch wafer Fab, 12A, has peaked this year so at least we have the first Fab depreciation will start to come down and the different situation will be — we have two up and running 12-inch wafer Fabs where we are spending the others. So the situation should be better compared to the first or the second Fab we are ramping.

Donald Lu - Goldman Sachs

Great. And then what is the depreciation forecast for next year?

Shiwei Sun

Overall we are looking for about 7%-8% year over year decline. We have two big 12-inch Fabs operating and also they are both depreciating, so supporting for the future investment and improved ROE.

Donald Lu - Goldman Sachs

Great. How is the pricing? I mean, when 8-inch Fab was fully depreciated I guess that was in 2005 or '06, the industry basically saw a step function of 8-inch price decline, do you think the 12-inch would repeat the same scenario or it's going to be very different?

Shiwei Sun

For the legacy technologies, actually the price erosion is quite stable actually. It's the advanced now with the fast price erosion.

Donald Lu - Goldman Sachs

Um-hum. You mean for next year I think both UMC and the TSMC will have some 12-inch Fabs start to become fully depreciated so the depreciation burden would be reduced for both (inaudible) as well. Do you see signs that people are going to be more aggressive on 12-inch pricing next year?

Shiwei Sun

I don't think that at this moment. Also, pricing is negotiated on a case by case basis with customers.

Donald Lu - Goldman Sachs

Okay, great. I mean, basically acquisition of (inaudible) and also potentially again — would the company’s profitability structure potentially change? I mean, for certain utilization across the company, would it be different in the next year too?

Shiwei Sun

First of all we don't know the exact timing of full integration yet, and secondly, both our 8 and 12-inch Fabs, and our (inaudible) probably can add on about 10% of UMC's capacity by UMCJ's by half and with an 8-inch wafer facility we are very confident to integrate both operations into our 8-inch business unit of the 8-inch P&L division. So we have high hopes for the results of integration, but again, it depends on the local government requirements and it also will take a few months for UMC Japan to complete the tender so it will take awhile. I think the next quarter we probably will be able to present a more detailed plan in terms of integration.

Donald Lu - Goldman Sachs

Okay. So UMCJ will add about 5% capacity to UMC?

Shiwei Sun

About 40,000 8-inch wafers per month.

Donald Lu - Goldman Sachs

Got it, great. Thanks.

Operator

Your next question comes from Bill Lu with Morgan Stanley.

Bill Lu - Morgan Stanley

Yeah. Hi, I just have one question on your gross margins. Obviously you've done a great job on cutting costs, and I just want to figure out how much more is there to go. So hypothetically if we look out a year, let's say the third quarter of 2010, you're doing the same revenues as you just did in the third quarter of this year. What do you think gross margins would be in that situation?

Shiwei Sun

It's difficult to answer these hypothetical questions, but I think we continue to drive down costs, especially on input costs such as raw materials such as power, water, et cetera, which is our common daily operation. So we do believe there will be some room, at least, for the raw material and utility side. However, on the manpower and other somewhat fixed expenses, we don't believe there will be too much room. So it really depends on which part of the component you are talking about. Overall I do believe we will continue to drive down the cost, although the magnitude will be a lot smaller going forward.

Bill Lu - Morgan Stanley

Okay. If I ask that in a slightly different way, if I compare your cost of goods sold to your competitor TSMCs, depreciation you are probably 15% higher as a percentage of revenues versus the TSM. I think that is hard to change in the short term, but if I look at variable costs divided by the number of wafers (inaudible), you're actually doing better and your cost is actually lower versus TSMCs. I mean, I guess that is positive in that you're running efficiently, but does that also say the upside from there is limited?

Shiwei Sun

Again, it's really component by component. As I mentioned, we do believe there is still room we can drive down the costs, and especially for raw materials and for other utility — indirect raw material, et cetera. But man power wise it is pretty much maxed out and in fact we start to budget the employee bonus so this part of the cost actually has been going up since the months of September and they are going forward as long as the company is expected to make profit we will continue to grow the employee bonus. So this part is very difficult to go down from current level.

Bill Lu - Morgan Stanley

Okay. And then if you look at the increase in manpower expenses versus the utility's materials, what will be a bigger impact going forward?

Shiwei Sun

Raw material of course is negotiated with our top line revenue so hopefully the savings can still outweigh the increase so that's why I mentioned earlier we still expect to see some improvement but with a lot smaller magnitude.

Bill Lu - Morgan Stanley

Okay, great. Thank you very much.

Operator

Your next question comes from Dan Malkan with Moore Capital.

Dan Malkan - Moore Capital

Just a question on the March quarter just in terms of your visibility, and I apologize if you answered this question already, but how much visibility do you have right now out towards the March quarter and what are you expecting relative to normal seasonality for the first quarter of 2010?

Shiwei Sun

So March quarter means the calendar Q1, right?

Dan Malkan - Moore Capital

Yes, that's right.

Shiwei Sun

So next quarter's guidance will be provided next time, but in general in Q3 we look at the inventory situation. It is very much under control. Actually, many customers' inventory level is continuing to slide down a little bit so inventory — also the channel sell through has been quite good so inventory should not be an issue. So we were guiding Q4, and in Q4 the situation depends also on the year end sales. So for an even further range of forecasts there are lots of uncertainties still like year end holiday sales and also other factors like (inaudible) consumer spending situations. And we are not able to provide guidance for Q1 at this moment.

Dan Malkan - Moore Capital

Okay. What would you — I mean, the last couple of years have been abnormal, what would you consider to be a normal Q1?

Shiwei Sun

Q1, like in the past — Q4 is seasonally a slow season. For our business Q1 is similar, but as we were guiding the Q4 which his kind of flat relative to a strong Q3, so I guess this year is somewhat different and that also makes the forecast more difficult.

Dan Malkan - Moore Capital

I see. And then just in terms of the communication side, what kind of trends have you seen in that market? Are you seeing orders accelerate? Are you seeing them slow down or are they just kind of flat lining here at the same level that they've been at the last couple of months?

Shiwei Sun

It's quite stable and not bad actually. It's quite stable communication with different wireline or wireless.

Dan Malkan - Moore Capital

Got it, understood. Thanks so much.

Operator

At this time there are no further questions in the queue. I would like to turn the conference back to over to Mr. Chitung Liu.

Chitung Liu

And with no further questions we will conclude our call today and thank you for joining us. You are more than welcome to contact us directly if you have further questions. 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, goodbye.

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