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Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q3 2009 Earnings Call Transcript

October 28, 2009 8:30 pm ET

Executives

En-Ling Feng – Director, IR

Morning Wu – Acting CFO and Chief Accounting Officer

Richard Chang – Founder, President and CEO

Gareth Kung – Senior Director, Finance & Accounting

Analysts

Randy Abrams – Credit Suisse

Eric Chen – BNP

Pranab Sarmah – Daiwa

Steven Pelayo – HSBC

Jonah Cheng – UBS

Rick Hsu – Nomura

Jagdish Iyer – Arete Research

Ke Chen – Shah Capital Management

Operator

Welcome to the Semiconductor Manufacturing International Corporation third Quarter 2009 Webcast Conference Call. Today's conference call is chaired by Dr. Richard Chang, Chief Executive Officer and President; Ms. Morning Wu, Acting Chief Financial Officer; Mr. Gareth Kung, Senior Director, Finance and Accounting; and Mr. En-Ling Feng, Director, Investor Relations.

Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's web site at www.smics.com. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we will be having a question-and-answer session upon which you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com.

Without further ado, I would like to introduce to you Mr. En-Ling Feng, Director, Investor Relations for the cautionary statements. Please proceed, sir.

En-Ling Feng

Good morning everyone and welcome to SMIC third quarter 2009 earnings conference call. Joining me on the call today are Dr. Richard Chang, Chief Executive Officer and President; Ms. Morning Wu, Acting Chief Financial Officer; and Mr. Gareth Kung, Senior Director, Finance and Accounting. As usual, our call will be approximately 60 minutes in length. The earnings press release and the presentation are available for you to download at www.smics.com.

Please also be reminded of the Safe Harbor statement stated as follows. SMIC's statements of its current expectations are forward-looking statements subject to significant risks and uncertainties. The actual results may differ materially from those contained in the forward-looking statements. Information as to those factors that could cause actual results to vary can be found in SMIC's Form 20-F filed with the United States Securities and Exchange Commission on June 22, 2009.

For today's agenda, Morning will highlight our third quarter 2009 financial results and the fourth quarter 2009 guidance. Following that, Richard will provide an update of our business. Then we will have our Q&A session. I will now turn the call over to Morning.

Morning Wu

Thank you, En-Ling. I would like to highlight the following items which are which are all stated in US dollars.

Total revenue increased by 20.9% to 323.4 million in the third quarter of 2009 from 267.4 million in the second quarter of 2009 and decreased by 14.0% compared to the third quarter of 2008. Gross margins improved to 0.8% in third quarter of 2009 compared to negative 4.8% in the second quarter of 2009 due to an increase in wafer shipments and fab utilization. Net cash flow from operations has increased substantially to 73 million in the third quarter from 43.2 million in the second quarter of this year. Loss attributable to holders of ordinary shares was 69.3 million in third quarter of 2009, compared to a loss of 98.1 million in the second quarter of 2009. Fully diluted EPS was negative 0.155 per ADS.

Summary of our income statement, balance sheet and cash flow statements are available in the appendix of the earnings press release. Our guidance for the fourth quarter of 2009 is as follows

Revenue is expected to increase 2% to 5%. Operating expenses, excluding foreign exchange difference, are expected to range from $67 million to $73 million. Capital expenditures are expected to range from $90 million to $95 million. Depreciation and amortization is expected to be approximately $193 million. Total capital expenditures for 2009 will be around $190 million.

I will now turn the call over to Richard for the business update and the review.

Richard Chang

Good morning and thank you all for joining us today. The third quarter of 2009 displayed a continued strong market recovery. In the third quarter of 2009, SMIC exceeded its original guidance, achieving about 21% quarter over quarter growth in revenue. Furthermore, we expect revenue for the fourth quarter of 2009 to continue to grow 2% to 5% quarter over quarter. Utilization rose to 87.3% in the third quarter compared to 75.4% in the second quarter. Significant growth was exhibited in consumer sales which grew 40.6% quarter over quarter.

Regionally greater China revenue grew by 33.5%. North American sales increased by 16.7%, and European sales increased by 3% quarter over quarter. North America maintained the largest contribution to revenue with strong growth in advance nodes while revenue contribution from greater China increased to 36.6% of total revenue in the third quarter of 2009 compared to 33.2% in the second quarter of 2009, and 31.2% in the third quarter of 2008.

In the third quarter of 2009, 80% of our new customers are from the greater China region. Our product mix is improving and we are accelerating our advanced node development. We see a shift to higher end products as sales from 0.18 microns and above are shifting into 0.13 microns and below. Our 0.13 microns and below wafer revenues reached 52.8% of the total wafer revenue in the third quarter of 2009 compared to 46.4% in the second quarter of 2009.

In terms of advanced technology development, our 65 nanometer production ramp is on schedule, and with our 65 nanometer low leakage library and key IPs in place we expect to continue to ramp up 65 nanometer shipments in the fourth quarter of 2009 and into 2010 and on. In addition, our 45 nanometer development is ahead of schedule with multiple customers working with us in various stages of qualification and we target our first 45 nanometer product develop by the end of this year.

We now provide a complete offering for advanced nodes down to 40 mm and we recently announced the extension of our technology to 55 nanometer as well. Moreover, we have started our 32 nanometer program and have engaged partners and customers in the research and development phase.

Looking into the fourth quarter of 2009, we see improving gross margins on higher revenue with significant growth in advanced node, including 90 nanometer and 65 nanometer nodes. Total depreciation and amortization expenses is expected to fall considerably in 2010 as most of our Shanghai 8 inch fab equipment fully depreciates. We continue to exercise vigilant cost control and expect our full-year capital expenditure to be around 190 million for the current year.

In summary, we continue to strive towards profitability through improving our product mix, advancing our process technology, and remaining disciplined in capital expenditure. I will now hand the call back to En-Ling who will moderate the Q&A session of this call. En-Ling, please.

En-Ling Feng

Thank you, Richard. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to one or two per call. Thank you. Operator, please?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Randy Abrams with Credit Suisse. Please proceed.

Randy Abrams – Credit Suisse

Yes, thank you. Good morning. For 2010 for deposition and amortization, could you put some numbers around the significant decrease you are expecting, and also if you could say what baseline CapEx you are basing that depreciation forecast on?

Morning Wu

We expect 2010 almost 80% of the Shanghai 8 inch fab will be fully depreciate, so around 13% of the total deprivation will decline.

Richard Chang

Randy, just as we said in Q2, it's about 30% which is 100 million.

Morning Wu

Yes.

Randy Abrams – Credit Suisse

Okay. And if I could follow-up then on the second half of that was the CapEx expectation for 2010, and the second question I wanted to ask was on the 0.18 and above, I mean you mentioned shifts of applications to 12-inch, where is utilization on the 8 inch now and do you see any – or where are you seeing new applications to back those some of that capacity, or do you think it still stays lower utilization?

Richard Chang

You want to talk about CapEx?

En-Ling Feng

Yes, Randy. I think right now we are monitoring the CapEx for 2010 to be slightly higher than this year. This is 190 million. So next year depending on the ramp up for the 65 and 45, we expect it to be slightly higher, but it'll still be much lower than let's say for 2008. So right now we're still finalizing the CapEx numbers, so we cannot disclose the exact numbers at this point. And I will ask Richard to answer the question on the 12 inch fab.

Richard Chang

So far we observed 8 inch fab with the copper backend demand very high, utilization rate is 100%. But for aluminum backend, we see the utilization rate to be around 80% or a little less, about in the range, about 80% so far. I'm sorry. 80% to 81%. So 8 inch utilization rate, we also observed that customers start to demand higher end of foundry services, which is 0.13 microns and 0.11 microns. Randy?

Randy Abrams – Credit Suisse

Okay. If I could follow-up on the CapEx, if it is just up slightly, how much wafer capacity do you plan to have available for 65 nanometer and 40 nm, either in wafers or a percentage of your capacity next year?

Richard Chang

I think we will answer in percentage. 65?

Morning Wu

CapEx?

Richard Chang

No, 65 capacity, 65 nanometer and 45, roughly.

En-Ling Feng

Randy, I think actually we are still keeping the same forecast that we (inaudible). We're forecasting about, depending on the market situation about 10K [ph] 12 inch capacity for 65 by the end of next year.

Randy Abrams – Credit Suisse

Okay, thank you.

Richard Chang

45 and 40, we already kept maybe up to 4000 (inaudible).

Randy Abrams – Credit Suisse

4000? Okay.

Richard Chang

Yes.

Operator

Your next question comes from the line of Eric Chen with BNP. Please proceed.

Eric Chen – BNP

Richard, good morning. My first question is related to the 65 nanometer process business, you just mentioned that kick of in Q4 this year, do you have revenue target in terms of the revenue portion will reach, like say 2%, and which quarter will be realized and less than 5% which quarter will be realized in terms of the total revenue? Thank you.

Richard Chang

Okay. For 65 nm, our target is to reach 2%, 3% at least in the fourth quarter this year, and to reach 5%. We expect – our target is still maybe first quarter next year.

Eric Chen – BNP

First quarter next year to the 5% level?

Richard Chang

Yes, this is our target.

Eric Chen – BNP

Okay, that is pretty good. And your capacity based on the 12 inch, how much percent is so far until today?

Richard Chang

12%…

Eric Chen – BNP

12 inch internal over the – I mean the…

Richard Chang

Revenue of 12 inch?

Eric Chen – BNP

Internal…

Richard Chang

We will get you the number.

En-Ling Feng

I am sorry, are you asking capacity or revenue?

Eric Chen – BNP

Capacity.

En-Ling Feng

Capacity, 12 inch capacity right now?

Eric Chen – BNP

Yes. And I mean how many percent of the total capacity comes from the 12 inch fab?

Richard Chang

We are generating…

En-Ling Feng

It is about 25%.

Eric Chen – BNP

25%, thank you. Probably number is good. And the other question I have is regarding to the OpEx. I don't know if I'm wrong – I mean no – the OpEx will get higher compared to the earlier guidance and could you give us an idea if (inaudible) going on funding OpEx and getting higher in Q3 and versus the earlier guidance?

Morning Wu

No. I think the Q3, we are – the OpEx increased due to the legal fees and the consulting fees. The way I expect in the Q4, the legal fees will be reduced.

Eric Chen – BNP

Okay. Would you mind giving us an idea how much of the legal fees and that will be the one shot and will it be the same amount or reduced amount going forward?

Richard Chang

We can give you the information. Q3, the legal fee is one shot, it is high but one shot. And Q4 reduced and maybe – but absolute number, we don't have the number for you yet, this is still very sensitive, so we will let you know later.

Eric Chen – BNP

Okay, thank you Rich. And last question I have that is regarding to the depreciation. And En-Ling just mentioned probably like US$1 million will be – I mean will be phase off because of the Shanghai fab fully depreciated, so in that case, around probably 10% to 12%, the year on year decline on the depreciation expenses and year 2010 focus by mix reasonable, that makes the sales focus (inaudible) isn't that correct?

Richard Chang

Eric, it is hundred million next year not 1 million, okay?

Eric Chen – BNP

I'm sorry, yes, hundred million, yes. And…

Richard Chang

And this year we are running at a rate of about 800 million.

Eric Chen – BNP

So that means 10% to 12% reduced right?

Richard Chang

About 13%, 12% to 13%.

Eric Chen – BNP

Reducing?

Richard Chang

Yes.

Eric Chen – BNP

Okay. Okay. So for next year, the depreciation expense forecast will probably be like 13% year on year reduced forecast I make is reasonable, right?

Richard Chang

Okay, thank you.

Operator

Your next question comes from the line of Pranab Sarmah with Daiwa. Please proceed.

Pranab Sarmah – Daiwa

Hi, good morning everyone. It is Pranab from Daiwa. My first question is on your legal fees, could you give the – what is the total amount on the legal fee, rough, one quarter, two quarter?

Richard Chang

This number is at this moment, it is a sensitive number, so we do not disclose the details. So it is one shot.

Pranab Sarmah – Daiwa

But if I take your guidance for the fourth quarter, so the difference between fourth quarter OpEx and third quarter OpEx was about $10 million, so it is fair to say ballpark number is near that level?

En-Ling Feng

Pranab, it is not – there is other factors in OpEx in Q3 and Q4. For instance, in the Q3 OpEx, we do not put in the R&D substitute, remember. In Q4, we do expect some coming in. So those are also number factors, it is not simple, just subtract the difference.

Pranab Sarmah – Daiwa

Okay. Even on the Q4, this OpEx guidance, you have included R&D subsidy but if I assume that R&D, you might get 25 to US$30 million, then it should be much lower than what you might have guided probably?

Richard Chang

Yes, Pranab, you are right. We, our target was higher than this. We realized it because of the documentation and processing of the subsidy, it took longer than we expected. But we use a lower number for the fourth quarter. If paperwork can be accelerated, then we expect to receive more. If not, the R&D subsidy will come in Q1 2010. We have been committed to do the R&D work, and we are very sure that we are going to receive this subsidy. The matter is when. If sooner, we get more this quarter; if a bit late, we get more Q1 next year.

Pranab Sarmah – Daiwa

Okay, got it. And could you get could you give a little bit more color, say you're targeting 5% of revenue at 65 nanometer in Q1 2010, how many percentage of that will come from China customer?

Richard Chang

At this moment, we expect majority of the 65 for next year, Q1, majority will be from overseas customers. And China customers we engage private deal with them [ph], they are still in the design in, processing, verification and qualification stage. We expect that in the second quarter or second half of 2010 that China customers, they will use more and more 65 nm.

Pranab Sarmah – Daiwa

And my last question is, 0.11 microns technology, are you going to ship out some of the baseband of 0.11 microns technology from your 12 inch fab?

Richard Chang

So far 0.11, yes, we have some customers use 0.11 and 0.13 technology for baseband. But most of the baseband customers use 90 nanometer and 65 nanometer node. And some expect to use 45 and 40 nanometer in later parts of 2010. So for 0.11, yes, but very few now. Percentage wise, it is more.

Pranab Sarmah – Daiwa

It is more, okay. Okay. Thank you, have a good day.

Richard Chang

Thank you.

Operator

Your next question comes from the line of Steven Pelayo with HSBC. Please proceed.

Steven Pelayo – HSBC

Great, thank you. Your 130 nanometer and below revenue now being the majority, congratulations on that, I guess the fourth quarter, you're looking for a little bit more of a mix shift. Can you help me just understand, beyond just 55 nanometer going to 2% or 3%, what the other nodes, the kind of 130, 110, 90 nanometer in general, how fast they are likely to grow in the fourth quarter?

Richard Chang

Okay. For 90 nm, we continue to grow approximately maybe 7%. But for 130 and 110 nm, we expect to grow approximately another 10% fourth quarter. This is our expectation now.

Steven Pelayo – HSBC

Okay. That is a pretty strong mix shift, okay. When I look at by segment, consumer was obviously quite strong in the fourth quarter, yet communication was kind of 5% or 6% quarter over quarter, and DRAM grew. So that mix is a little caught, I wasn't expecting that, can you talk about that and then your outlook for the first quarter?

Richard Chang

Yes. Actually, we are very strong in especially China market is very strong in communication as well as in consumer products. In China, many people make PCs but not too many greater China based – many China-based companies design PC ready chips, very few. So that affects us to a certain extent. So our PC related revenue is very small, only 5.3% in Q3. But in Q4, we expect this number, it is a small number, but may grow another 20% or so PC related. Then this is about the PC. Then you asked about DRAM. DRAM, while the number is very small, so you see strong growth. So for all special DRAM, for low power related or specialty applications, more density for special obligations. We in Q3, the revenues is more, about $13 million. And Q4, this number may drop a little bit to a certain extent because we did not see the DRAM to – so maybe slightly drop in Q4.

Steven Pelayo – HSBC

Great, thank you. And then on gross margin, you mentioned in the press release and I think on the call that you expect some expansion there. I understand that there is probably a bigger impact with that deposition coming down 13% in 2010, but I'm really curious that where do you think gross margin will end up next quarter as mix improves, it sounds like, and…

Richard Chang

Sorry.

Steven Pelayo – HSBC

So, yes, where do you think fourth-quarter gross margins are going…

En-Ling Feng

Steve, this is a very good question. We are presently seeing an improvement in gross margin in Q4 but right now because (inaudible) Q1 we are still not firm about Q1 orders, and Q1 shipments affect Q4 wafer start. So that we will have impact on the Q4 gross margin. So we cannot give you a precise number right now, but we're seeing it is going to improve quite a bit in Q4.

Steven Pelayo – HSBC

If you were to put a range around that, do think that you're actually going to be up single digits, mid single digits, and any general range?

En-Ling Feng

Steve, we think that it is going to have a pretty good improvement. So maybe in the next one month or so, when you see more clarity on Q1 orders, we can give you more color on that.

Steven Pelayo – HSBC

Okay. What was actually going my next question is well the first quarter outlook, I understand your visibility I guess is somewhat poor, but some of the longer lead times, and some of the customer engagements that you have had, can you just, do you think that your 130 nanometer and below in Q1 still continues to grow at least?

Richard Chang

En-Ling has a number if you want to highlight it.

En-Ling Feng

Yes, Steve, we see that continue to grow and shifting. And if you're looking to 0.13 and below, which means 0.11, 90 and 65 and those, we expect probably grow more than 30%. So there will be a broad shift and product mix change in Q4.

Steven Pelayo – HSBC

I'm sorry. The 30% was in Q1 you expect?

En-Ling Feng

Q1, yes, sir.

Steven Pelayo – HSBC

I'm sorry; I didn't understand your answer. So 130 nanometer and below, in Q1, do you expect that to grow quarter on quarter?

En-Ling Feng

No. I was saying for the next quarter, yes.

Steven Pelayo – HSBC

For 4Q, 30%?

En-Ling Feng

Yes.

Steven Pelayo – HSBC

Okay. And your thoughts on…

En-Ling Feng

For the first quarter, then we probably expect it probably will maintain for the Q4.

Steven Pelayo – HSBC

Okay, thank you.

Operator

Your next question comes from the line of Jonah Cheng with UBS. Please proceed.

Jonah Cheng – UBS

Hello, very quickly, I just have one question about ASP trends, can you talk about ASP situation in the fourth quarter?

Richard Chang

ASP trends for the next two quarters? I am seeing if En-Ling has an answer, the trend?

Jonah Cheng – UBS

Yes.

En-Ling Feng

Jonah, as we look into this quarter, which we came down some and because of the fact of Q1 Q2 underutilization, so the pressure on the price. Then we start to, we see the next quarter that ASP will start to climb back. And into the Q1 and next year, because our 65 nanometer will also ramp up some, a little bit more, so we will see continued – so that very low single digit up, and so that is the whole market changing in Q1, which at this point we expect is a fractured [ph] business into Q1.

Jonah Cheng – UBS

Thanks. And also can I have your target for the 65 nanometer contribution in the whole year 2010? Or end of 2010?

En-Ling Feng

We are looking to the 2010 as a whole and we expect – we targeting maybe somewhere around 15% as our revenue contribution from 65.

Jonah Cheng – UBS

Thank you.

Operator

Your next question comes from the line of Rick Hsu, Nomura. Please proceed.

Rick Hsu – Nomura

Hi, Richard. Congratulations on the margin side, pretty much strong Q3. And my question is on the margin side in Q3, particularly on the cost of goods sold. In the last conference call, you mentioned about you may receive some government subsidy for the research and development, just wonder if you have received this portion in your Q3 numbers?

Richard Chang

In Q3, we did not receive any. We know that R&D subsidy, we already started the work, will come in some in Q4.

Rick Hsu – Nomura

Okay.

Richard Chang

(inaudible) how much but more will be coming either in Q4 or Q1?

Rick Hsu – Nomura

So your guidance for further gross margin improvement in Q4 does include a little bit of this subsidy, am I right?

En-Ling Feng

No. Actually the R&D subsidy would not affect gross margin. It will only affect operating margin.

Rick Hsu – Nomura

Okay. So that portion will in the G&A?

Morning Wu

Yes.

En-Ling Feng

That is right.

Rick Hsu – Nomura

Okay.

En-Ling Feng

So when we talked about improvement in gross margin in Q4, we are talking about mainly because of the shift in the product mix.

Rick Hsu – Nomura

Got you. Second question is a little bit follow up with the ASP, did you mention about your ASP improvement or decline for Q3?

Richard Chang

Decline, Q3 the decline, and Q4 will be going up.

Rick Hsu – Nomura

Right. And can you quantify how much decline for Q3, roughly?

Richard Chang

4.7%.

En-Ling Feng

It is between 3% to 4%.

Richard Chang

Yes. If we take, just to simplify this…

Rick Hsu – Nomura

3% to 4% simplified…

En-Ling Feng

(inaudible).

Rick Hsu – Nomura

Okay, thank you. And last question is on your 45 nanometer tape out you are aiming in Q4 this year, which is pretty good progress, and just wondering if you can elaborate a little bit more in term of applications which areas for this 45 nanometer tape out?

Richard Chang

It will be for PC, for the station, but not CPU, other products on PC applications.

Rick Hsu – Nomura

Okay, thank you so much.

Richard Chang

Thank you, Eric.

Operator

Your next question comes from the line of Jagdish Iyer with Arete Research. Please proceed.

Jagdish Iyer – Arete Research

Hi. Thanks for taking my question. Two questions Richard. First question is that this morning UMC said that it under invested for the past two years and they said they are going to substantially increase CapEx for 2010. My question is do you subscribe to that view for SMIC? And a follow up question would be, how do you think your CapEx split will be for 65 nanometer and 45 nanometer and can you tell us what kind of challenges do you foresee in 45 nanometer production? Thank you.

Richard Chang

Thank you. We also observed the same demand for more foundry surfaces in 65 nanometer and 45 nanometer area. However, based on our situation for 2010, we will not significantly increase our CapEx. Instead, we will increase them and use all the money basically for 65 and 45 because our 8 inch and more the larger technology node, we have adequate amount of capacity, and we want to increase the utilization rate, increase the profitability for 8 inch or for the larger technology node. For next year, we expect this is my estimate to maybe compared to 65 and 45, maybe 70% for 65, 30% for 45.

Jagdish Iyer – Arete Research

And your – my question is on the challenges for 45 nanometer please?

Richard Chang

Challenges, 45 so far we have been working with – we are trying for IBM's 45 technology, works very, very well. So far IBM gave us a test chip and our 45 nanometer yield can reach more than 90%. I'm very happy to announce this to you and IBM's send [ph] our testing method, everything used more than 90% now. So the challenges we need to provide enough IP to come along with the technology. Technology testing pre-qualification, we already completed it, and two thirds of the follow-up already has (inaudible) major operation live test and all passed and the third lot is still in the testing process. So that part is okay.

Challenges also work on the 40 nm; we are starting to quickly to prepare for 40 nanometer for our customer. So far the 40 nanometer test chip used was recently good yield as well. Have I answered your question? So we plan to introduce 45 nanometer. This is our target to support to serve first customer by the end of this year and 40 nanometer we expect to, this is our target, to serve customers maybe third quarter 2010. This is our target.

Jagdish Iyer – Arete Research

Thank you.

Richard Chang

Thank you.

Operator

Your next question comes from the line of the Ke Chen with Shah Capital Management. Please proceed.

Ke Chen – Shah Capital Management

Yes, Richard, congratulations for the good quarter. Just want to confirm, first of all, unlike your competitors, you have a very disciplined CapEx for next year. That is the case? I would like to just want to confirm that?

Richard Chang

Yes, correct. Next year as I mentioned we will forecast on 65 and 45 technology capacity and IP conversion this kind of thing.

Ke Chen – Shah Capital Management

Okay, sure. Second of all, I'm just wondering if I look at 2010, in terms of profitability, do I expect it in the first half or towards the end of 2010?

Richard Chang

We expect, this is, I should say – we- our target is to reach profitability third quarter next year. For the whole year, we expect again our target to be profitable for 2010. While we just say the reason we say that second half next year because actually bulk of our depreciation will be (inaudible) in the second half of the year.

Ke Chen – Shah Capital Management

Okay. I see. Thank you.

Richard Chang

Thank you.

Operator

(Operator instructions) We have a follow-up question from the line of Steven Pelayo. Please proceed.

Steven Pelayo – HSBC

Great, thank you. To follow up on the last question there, you guys talked about reaching this break even in 2010, I think you said at a 20% gross margin, can you remind us what the assumptions are for utilization rate and product mix to drive that 3Q profitability and full year break even or better?

Richard Chang

Steve, I think the last time we mentioned is 20% as where our breakeven target for the gross margin. And so for Q3, therefore if you do the math, we do expect higher than 20 in order to average the first half.

Steven Pelayo – HSBC

Okay, but what are the utilization rates and I don't know 65 nanometer or 90 nanometer and below assumptions in there, embedded in there?

Richard Chang

Overall utilization rate for the – 85 to 95% is where the estimate calls for. And the product – the revenue percentage for the high end, Gareth can comment on that.

Gareth Kung

Yes. I think if we just – we're going to increase 65 and 45 nanometer based on the market demand, so we do expect to maintain a pretty high utilization for the advanced nodes.

Steven Pelayo – HSBC

I mean effectively you guys just had utilization rate 87%, you're not really talking much of a change there, so it is going to be more in the capacity line, and I know you guys are still kind of balancing fab for there and you spoke about at the analyst day how you could cheaply ramp more capacity there. So rather than just be focusing on you CapEx dollars next year, can you give me a target of where you want to take your current 165,000 wafer starts per month a year from today or exiting 2010?

Gareth Kung

If you compare to the Q3 capacity, we're looking at about 10%, around 10% increase.

Steven Pelayo – HSBC

I'm sorry. 10% increase a year from today so is that what we are kind of thinking about or…

Gareth Kung

Yes. I mean if you look at compared to our end Q3 capacity, so we're talking about maybe around 10% increase in capacity.

Steven Pelayo – HSBC

Okay, thank you.

Operator

We do have a follow-up question from the line of Pranab Sarmah. Please proceed.

Pranab Sarmah – Daiwa

Hi, thank you for taking my question. Basically based on your guidance for fourth quarter, it looks like your shipment will be sequentially flat to up, (inaudible) will be slightly up, and that is correct, or shipment will be sequentially flat to down?

Richard Chang

For Q4, our shipment will be higher, and SC [ph] will be higher, that's why we expect 2% to 5% revenue increase quarter over quarter.

Pranab Sarmah – Daiwa

Got it. And if US dollar continued to depreciate, what will be the impact on your margins?

Richard Chang

It is not going to have a big impact because actually most of our costs are also expressed in US dollars, except for a small percentage I think, but that is going to – it doesn't have much impact on our results.

Pranab Sarmah – Daiwa

Okay, thank you.

Richard Chang

Thank you.

Operator

At this time, we have no further questions. I would like to turn the call back over to Dr. Richard Chang for closing remarks. Please proceed, sir.

Richard Chang

For this year, the worst was over for foundry in the first quarter. And the second quarter was our time for recovery and further recovery continued into the third quarter and fourth quarter. We continue to commit to improve and strengthen our technology and financials and strive for profitability. And we all thank you for joining us on today's call. Please feel free to talk to us and visit us anytime. And God bless you all. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Semiconductor Manufacturing International Corporation Q3 2009 Earnings Call Transcript

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