Welcome everyone to UMC's 2008 Q2 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. Please follow the instructions given at that time if you wish to ask a question. 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 www.umc.com under the Investor Relations/Investor Events. Today, I would like to introduce Mr. Chitung Liu, CFO of UMC. Mr. Liu, you may begin.

Thank you and hello to everyone. This is Chitung. We are happy that you could join us for today for our conference call. We are hosting this conference call from Taipei. And with me here are 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 second quarter in 2008 and then Dr. Sun will provide UMC's future direction after he is on board as the CEO. Then an update on our business and forward-looking guidance, follow lastly with a Q&A session. Before beginning this presentation, I would like to remind everyone of our Safe Harbor policy. That is certain statements made during the course of our discussion today may constitute forward-looking statements which are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond the company's control. For these risks, please refer to UMC's filings with the SEC and in the U.S. and the ROC Securities authorities. For the second quarter in 2008, revenue was NT$25.24 billion, representing a 5.1% quarter-over-quarter increase from NT$24 billion in Q1 2008, and a 0.6% year-over-year increase from NT$25.1 billion ending in second quarter 2007. Gross profit for the quarter was NT$5.8 billion or 23% of revenue, compared to NT$3.6 billion or 14.9% of first quarter '08 revenues. Operating profit was NT$2.3 billion or 9.3% of revenue compared to NT$190 million or 0.8% of first quarter '08 revenue. Net income was NT$2.4 billion in 2008 second quarter compared to a net income of NT$206 million in Q1 '08. EPS for the quarter was NT$0.19, and earnings per ADS were US$0.032. You can look for more information within the financial data that accompany our press release today. Now let me turn the call over to Shih-Wei and he will provide you with UMC's direction, the business update and outlook for the third quarter of 2008. Shih-Wei, please. Shih-Wei 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 interest in UMC. During this conference call, I will begin with a brief introduction on the direction of the company and then provide you with a brief summary of our operating results of the second quarter. You all should have been seen our press release by now. So, I'm going to keep these remarks short. Following this we will leave the rest of the time for your questions. To begin with, we have been facing strong headwinds due to the global macroeconomic situation. We saw subprime issues the U.S. High inflation from oil and the material price increase and the weakening U.S. dollar, all leading into the potential concern of stagflation in the macro economy. These challenges have led us to have a more conservative outlook for the upcoming quarter. Now, let's look at the UMC situation. UMC is in a leading foundry position. There are four pillars that UMC needs to sustain to be a successful foundry. They are: first, independent R&D capability. For example, UMC's 45 and 40 nanometer is now at the pilot and qualification stage. The progress on 32 and 28 nanometer is also quite good. The second item is our manufacturing excellence. The third item, dedicated employees, and the fourth item, strong financial structure. We slowed that ratio and the strong cash position. UMC does possess all of these core competencies and is well positioned to weather the cycles in the semiconductor industry. Having said all of this, UMC has been aligning our teams and efforts. The alignment is to focus on customer-based solutions. UMC internal organizations, efforts, metrics have to align to customers. With additional efficiency enhancement, cost control, at the same time emphasizing team work and execution, we are expecting to increase UMC business share from key customers. Using 65 nanometer as an example, UMC has successfully qualified a customers product since March 2006 with [indiscernible] power and the performance reaching the industry benchmark. Many designs and pilots are in the pipeline now. Along with our CapEx discipline, UMC will improve profitability and the long term ROE by all above efforts, with focus back on customer service. In terms of strength in UMC's R&D collaboration, UMC is joining SEMATECH o focus on research and the development for exploratory technologies on 300 millimeter wafers, including 22 nanometer and beyond process generations. The combination of UMC's 300 millimeter manufacturing experience, process technology expertise, and SEMATECH's wealth of knowledge in the field of semiconductor R&D will help ourselves in the industry to better handle the challenges of migration to next-generation processes. Above said are my summery of the UMC's direction. As the newly appointed to CEO of UMC, I am happy to report that in Q2 2008, UMC saw improvements in revenue, gross margin, and operating margin as compared to Q1. These results were in line with our previously released guidance. Customer demand for advanced 90 and 65 nanometer generations remain steady, with combined revenue from this process nodes totaling 36%. Looking forward to Q3, we see that the environment is more challenging than we previously expected. In general, customers have adopted a cautious attitude due to the rising uncertainty in the global economy. We'll continue to monitor the situation closely and adjust all our operations accordingly. The guidance for the third quarter is wafer shipments to be flat from pervious quarter; wafer ASP in U.S. dollars to decrease by approximately 0 to 2 percent points; impact from currency fluctuation 0% to minus 2% on revenue; capacity utilization rate approximately 80%; profitability, gross profit margin to be in high teen percentage points. The consumer segment is expected to be the strongest, followed by the communication and the computer segments. 2008 CapEx budget US$500 million to US$700 million. So, going forward, as CEO, my top priority is to ensure that UMC's foundry solutions deliver the greatest benefit to our global customer base. This will enable us to increase our market share from our key foundry customers, maximize profitability and long-term return on equity. That's all from my report. Now, let's begin the Q&A session. Thank you. Question And Answer

Thank you. [Operator Instructions] Our first question is from Steven Pelayo from HSBC. Steven, please go ahead with your question.

Great, thank you. I am a little unclear on your gross margin guidance for the third quarter. You are guiding down, I guess, more than 300 basis points on revenues down may be a couple of percentage points, it looks like. That seems more aggressive than what would normally apply here. Is your depreciation and your cost to good sold going back up or your variable costs going back up or there is some yield issues? I really just don't understand why gross margins going to fall so significantly on such a minor revenue decline.

Okay. Hi, Steven. Most of the potential decrease to drive down our revenue in third quarter are pricing related. You see there is a blended ASP in U.S. dollars due to the mix change or the NT dollar is changing rate of fluctuation against U.S. dollar. Or we will take out our pure profit given the moving direction. And in the meantime, we also need to have counted the WIP, the work in process, wafers to determine the unit cost per wafer in a given quarter. So, in a way that could suggest we take a relatively more conservative WIP forecast for the following quarter in order to have slightly above average cost structure in the third quarter.

Okay. Just to clarify, in the June quarter, your depreciation and cost of goods sold managed to fall about 7% sequentially. Does that remain at that level going into September quarter?

It should be in the similar level, probably around 5% or so.

Okay. So, then all that comes from the other part, non-depreciation. Great, thank you.

: Thank you. Our next question is from Pranab Sarmah from Daiwa Securities Pranab, please go ahead with your question.

Yes, thank you very much for the question. Dr. Sun, my question to you would be since you become the new Chief Executive Officer, what you are going to do to improve the image of UMC for among the investors number one, and also to improve the image of UMC among your customers? Shih-Wei Sun: So, thanks a lot for the question. For UMS's direction, we will continue to emphasize our core competence, and as I mentioned earlier, to make more focus on the customer-related service from a foundry point of view. So, if we can do those well in the... I also mentioned in the report that we will probably do much better in increasing the share from our major customers to strengthen our fundamentals.

And do you have any plan for the long-term ROE goal? What would be the... that benchmark could be? Shih-Wei Sun: As of today, our goal is we need to do much better job in long-term ROE, but that's certainly our direction. We don't have any specific goal at this point of time.

Okay, thank you.

Thank you. Next in the queue we have Donald Lu from Goldman Sachs. Donald, please go ahead with your question.

Hi, yes, good evening. Can you give us a guidance on the percentage of revenues will be from 65 nanometer in Q3?

It will be in between 5% to 7%. Shih-Wei Sun: 5% to 7%.

Okay, great, thanks.

Thank you. Next in the queue we have Randy Abrams from Credit Suisse. Randy, please go ahead with your question.

Yes, hi, good evening. Wanted to ask to clarify the utilization in the second quarter. I think the simple math there would be closer to 80%, but the reported number is 85%. Does that imply your building inventory into third quarter now that wafer shipments are flat or could you may be walk through the difference in utilization and what that implies for inventory?

There's one or two customers did a quarter-end push out in terms of delivery. So you are correct, our wafer manufactured during the June quarter is higher... slightly higher than the number of wafers shipped in the June quarter. Some of the wafer will be pushed into the third quarter.

Okay. On that, if you look at third quarter, I am curious what your expectation would be even directionally into fourth quarter, with third quarter coming in a bit weaker than the last few years. Do you expect fourth quarter, if we take, say, '06 and '07 down, say, high single-digits, is that an approximate range or may be directionally how do you see fourth quarter shaking out at this stage? Shih-Wei Sun: So, today we are seeing weaker than expected third quarter. As far as today, we don't have much visibility in Q4 yet.

Okay. Yes, if I can ask the one follow-up question to Steve [ph], in the second quarter on the non-depreciation COGS, that went down sequentially even though the shipments went up. Was there one-time benefits that affected the second quarter margins, let's say, or pulling back in the third quarter?

No, there is no so called one-time event in terms of cost structure in the June quarter. Most of the decline, if you come to the depreciation, there is about 7% quarter-over-quarter decline in the part of cost of goods sold related depreciation. If you take out depreciation, most of the benefit comes on our cost reduction program, which has been initiated late last year. And we do see pretty good result in the first quarter and the second quarter. According to the third quarter and fourth quarter, I'm not so sure if we can see the same magnitude of cost reduction by the whole cost-related control effort we are continuing into the rest of the year.

Okay. Then one more question just on the demand outlook. You mentioned I think communications and PCs relatively weaker. Could you maybe go a step further on applications, say, wireless versus networking and then for PCs, I guess, graphics, driver ICs, peripherals, just how some of the applications are looking? Shih-Wei Sun: So, those are just the general comments. In the consumer area, the demand seems to be stronger than... followed up by the communication and computer segments. In terms of the communication segment, handset base band is... the demand is weaker and for computer area, the chipset plus graphics is becoming relatively weaker. On the consumer side, the set-top box, DSC, and flash controllers are experiencing a stronger market demand in the third quarter.

Okay, thank you for that.

Thank you. Our next question is from Bhavin Shah from JPMorgan. Bhavin, Please go ahead with your question. Bhavin Shah from JPMorgan, your line is now open to ask a question.

Yes, thanks. Is my line open?

Yes.

Okay. This is Bhavin Shah. Okay. Chitung, just first question is on the book value and the balance sheet. So there is recognition of change in the, I guess, well, unrealized gain or loss in the investments. If you can just remind me of the treatment actually, when you do the final realized gain or sale, that entry is reversed and taken to the income statement.

If it's available for sale, for short term, we will do mark to market on a quality basis. So it will affect both the income statement as well as the balance sheet. If it's a long-term under equity, then we will do impairment... under equity method, then we'll do so called the impairment test each quarter. If there is a impairment, that will also go into P&L as well as the balance sheet.

Right. So the drop in book value in this quarter and last quarter is pretty significant. But I don't see that impact on the P&L. So that's why I'm just trying to understand how that works.

Yes, that's not impairment-related.

Okay.

So, you do have to value those equity method long-term investment as well. But that will only appear in the balance sheet.

So, that is related to what? Sorry, I didn't understand.

For listed long-term investment.

So that is not related to impairment, right? So that's --

It's not related to impairment.

Right. So that's related to what? Sorry.

That's related to listed long-term assets.

Oh, listed assets, okay, okay. So, basically when you actually realize the gain or sale, will the... in that case it goes through P&L, right?

Only realized.

Only realized, yes, okay. Okay. Got it. And the second question was the margin improvement. Did... as you explained earlier, there is some push out from couple of customers. So the wafer out and wafer shipped under the GAAP, did that contribute to the margin upside at all or?

That's not really related to margin.

Okay. Okay. And as far as depreciation, you mentioned that the third quarter will be about within 5% of second quarter?

That's only in the part of cost of goods sold.

Got it.

The company-wise depreciation, which includes operating expenses such as R&D related depreciation, it will be only about 2% or so.

I see. And can you give any color for Q4, how the depreciation may work?

I think for the whole year, year 2008 versus 2007, the depreciation will be about 2% less.

Okay.

And 2009 over 2008, we are planning about 10% depreciation decline in '09.

'09 10% decline?

Yes.

Okay. Thank you.

Yes.

Thank you. Next in the queue we have Steven Pelayo from HSBC. Steven, please go ahead with your question.

Well, my questions have been answered. But if I could just try to get some clarification here, in the third quarter if you are guiding total revenues relatively flat to down here after ASPs and currency impacts, and the computing segment is the worse relative performer, could you kind of help me understand historically shouldn't the PC segment be seasonally one of your stronger segments in the third quarter? Why would you think it's so relatively underperforming and how significant is the decline in PCs relative to the, I guess, flattish or may be sequential growth in consumer? Shih-Wei Sun: So, for Q3 PC segment, the reason for us Q3 is relatively weaker is because some our key customers are adjusting inventory and also the end demand is relatively weaker. This is what we see from UMC for this third quarter, which is certainly different from the past years. And also, we in general attribute it to global macroeconomic situation.

Okay. Thank you.

Thank you. Next in the queue we have Chun Tan from Mystic Capital [ph]. Chun, please go ahead with your question.

Hello. Good evening. I have got one question regarding your operating expenses. I noticed that your operating expenses in both Q1 and Q2 has declined about 7% year-over-year compared to last year. And this is in spite of the fact that you started accounting for employee bonuses in 2008. So, I just wanted to get a little bit more detail on that time. What is leading to the decline in operating expenses and also what do you see happening for the rest of the year, and if you have any outlook for 2009 as well? Thank you.

Yes, as I mentioned earlier, we initiate cost reduction program, actually a more intense one, in the late last year. So the benefit we have seen in the margins in Q1/Q2 largely attributed to the cost reduction program that goes to operating expenses line as well. So I think more tighter budget control on SG&A as well as other related item are the main reasons. As I mentioned, all the assets will be continued into rest of the year. But we are not very sure if we can continue to push down the operating expenses on the same magnitude. So, I think it's safe for you to budget similar operating expenses as second quarter for the rest of the year. And as for employee benefit or bonus, so far we have budgeted about NT$180 million up to mid-year 2008. And the majority actually is in the line of cost of goods sold, and only some in the operating expenses. About two-thirds in cost of goods sold, one-third in operating expenses.

Okay, thank you. And just regarding your budget control and your cost reduction program, does any of that impact on your R&D spending for process development? Shih-Wei Sun: No. For the cost reduction average, it's mostly from the cost of the goods sold, like Chitung mentioned, from factory point of view. On the operation expense side, there are really lots of central support functioning, we are driving the efficiency. R&D side we are not ready. R&D is also engaging across the board efficiency enhancement, but we are not reducing the R&D investment at all.

Okay, and thank you very much. Shih-Wei Sun: Thank you.

Thank you. Our next question is from Randy Abrams from Credit Suisse. Randy, please go ahead with your question.

Yes, wanted to ask a follow-up on the utilization. If you could talk about leading edge versus lagging edge second quarter and then third quarter, which is with the relative trend for HR. And then pricing-wise, what do you see for ASPs firming up, leading edge and lagging edge relative to the past with a lot of the talk about higher costs getting passed through and trying to push more pricing out to customers? Shih-Wei Sun: So, from loading point of view, both 12 inch and advanced leading edge technologies has better loading relatively to the overall company loading. In terms of the pricing, as we mentioned earlier, today our operation focus is focusing on the customer service. We try to provide better service to customers as far as the pricing. It's on the demand-supply situation. And we are working with customers on a partnership point of view instead of near-term technical, tactical pricing adjustment.

Okay. Can you see ASPs firming up relative to the recent trend? Shih-Wei Sun: It depends on the segment and application. 8-inch, 6-inch, 12-inch is such a prospect such a broad spectrum, each case is somewhat different.

Okay. Is one area doing better than the other in broad strokes like 12-inch versus 8-inch/6-inch? Shih-Wei Sun: Not necessarily. Also it is customer-based.

Okay. And then one follow-up just on the SEMATECH, which you've announced recently. Are there any meaningful implications for R&D spending as far as getting... either getting leverage from the partnership or needing to contribute R&D reinforces to the joint development? And maybe what technology nodes do you see some of that development work paying off for you guys? Shih-Wei Sun: For SEMATECH, we mentioned in the press release, we are focusing on the exploratory technologies, but specifically on 22 nanometer node and beyond. From R&D cost saving point of view, it is definitely beneficial. For example, for 22 nanometer, we may have to use extreme UV or advanced tool. So by joining the 12 inch R&D consortium in SEMATECH, we may gain the advantage of early engagement. However, we can probably delay the procumbent of our R&D to us of this very expensive advanced R&D to us until they are really mature for production purpose.

Okay. Thank you.

Thank you. Our next question is from Steven Pelayo from HSBC. Steven, please go ahead with your question.

I am curious on your guidance for 2009 depreciation down about 9% that can have a meaningful impact on the gross margin next year. Did that... is that from an overall perspective or do you expect the depreciation in cost of good sold to come down by 9% as well? And what has that been implied for your next year's capital spending?

Basically, first of all, it is 10%, it's not 9%.

Okay.

And generally speaking, the cost of goods sold related depreciation, at least for this year and next year, may come down a little bit more than corporate average. So, the answer is slightly higher than 10% in the cost of goods sold line. And as for the CapEx for '09, currently we don't have a target. Of course, 10% is based upon internal numbers, but, I guess, all we can say is our CapEx will continue to be very discipline managed.

Okay. And then I am curious just on a bigger picture question, the goal to be a little bit more pricing disciplined across the industry that's been all the talk of the last couple quarters or so. Given that the industry environment weakened here, utilization rates have fallen, potentially falling into fourth quarter and then into the seasonally slowest first quarter, I think that's when certainly TSMC was hoping to be enacting much more disciplined pricing at that point, do you think that strategy is going to be much more difficult to implement given the much more weaker environment here? Shih-Wei Sun: For UMC, we have never engaged in any firming up of pricing specifically or across the boar. Again, all the pricing discussion are based on a customer by customer situation, and foundry service space. So we don't have any general comment on pricing.

Okay. And my last one, just to follow-up my previous question, the weaker relative computing performance in the third quarter, it's all graphic and chipset related? Is there anything else to that? Shih-Wei Sun: It is chipset and graphics related.

Okay. Thank you. Shih-Wei Sun: Thank you.

Thank you. Our next question is from Donald Lu from Goldman Sachs. Donald, please go ahead with your question.

Yes. Can you shed some color on whether the third quarter gross margin decrease has anything to do with the cost inflation? I think, Chartered commented that the utility and material cost inflation had a major impact on its margins.

Just on utilities, it's about 0.15 percent point of our total margin rate. But if the utility continue to go up another 15% as the government planned, then we will see another 0.15 point negative impact on our profit margin. So up to now we only put in the first phase of price increase, so above 0.15%.

Okay. How about the consumable materials and wafer substrate? Are you... any inflation there?

Not so much.

Okay. Thanks.

: Thank you. Our next question is from Dan Heyler from Merrill Lynch. Dan Please go ahead with your question.

Thank you. Yes, there is couple of follow-ups on today. Dr. Sun, on the 65 nanometer, you discussed engagements there and products in the pipeline. Are you currently shipping low power 65 nanometer? Shih-Wei Sun: Certainly.

Okay. And then what portion, I guess, of that total revenue is, as you look towards year-end... I think today you had mentioned that it may be 7% to 8% of revenue by year-end, is that a fair assumption? Shih-Wei Sun: It is about 5% to 7% mentioned earlier. So there are a lot of 65 nanometer products in the pipeline on the final verification stage. As I mentioned earlier during the day, I think next year it will be much larger scale of ramp on 65.

And how would see your low power versus performance given that you have been successful in some engagements in graphics? Would you expect your mix of 65 to change at all relative to 90? Would we say you will see more performance-driven products relative to low power or would the mix be about the same as 90? Shih-Wei Sun: Yes, we said that's definitely our goal to have more diversified customer base and having more high performance customers. And it's happening.

Okay, great. And then, I guess, as look at this potential for rising utility costs, I guess, is one element in addition to industry slowdown, but do you think you can pass on some of these costs... this is, I guess, a pretty unprecedented situation where we've seen this kind of inflation in the industry. Is there any precedent where we've seen foundries able to pass on some of these costs that are being shared across the industry? Shih-Wei Sun: You're asking the past experience or --?

Is there a precedent of that happening? And then do you think you can kind of past these costs on going forward? Shih-Wei Sun: I don't recollect in the past where foundry has been passing the inflation cost to the customer. But again, it's... we've seen the utility everything is becoming more expensive because of inflation. However, the supply-demand situation in the foundry domain still exists. So where do you strike the balance is really critical.

Okay, great. And then my last question was for Chitung. It was more of a technical question. On the share count, Chitung, for the fully diluted outstand shares, could you give us the third quarter forecast for fully diluted outstanding shares? Sorry about that.

It will be... first of all, it's in report, okay, in the press release. And then I'm going to read the numbers. It's 13,856,573.

Okay. The reason why I ask is it was in the second quarter press release as well, it was close to that number. But what I heard is when you actually reported second quarter before your diluted number was significantly lower. So, I'm worrying why in March it was over 13 and then it dropped in your reported number. Would we see this 13.5... 85 number go down again in the third quarter and if so, why?

Well, we do have a schedule to cancel about 2% of treasury shares by the end of this year. So, it depends when we will cancel those shares. And we're also scheduled to pay some stock dividend in the August-September timeframe. So it will be kind of net-net impact. So, it shouldn't be too much change.

So should we model the second quarter fully diluted shares, which is more in the 12 to 12 the range or do we do the June number?

Well, if you are talking about fully diluted, it will be 13.5 something.

Okay, including the potential stock dividend and treasury cancellation.

Yes.

Okay, thank you.

Thank you. Our next question is from Pranab Sarmah from Daiwa Security. Pranab, please go ahead with your questions.

Yes, thank you for taking my questions. The question is mainly on the 45 nanometer, Dr. Sun., like, could you give us some color like how many customers you have really engaged at 45 nanometer currently and how many products you are basically doing prototype at this point? Shih-Wei Sun: So, for 45 nanometer, we have at least six customers engaging with us and with both low power and high performance doing test chips today.

And you expect to go for mass productions by what timeframe at least for the first product? Shih-Wei Sun: That depends on the nature of product. Some of the products, the ramp will be slower, some are quick. But both will happen, both high performance, low power will happen next year in terms of the volume ramp.

And in the second quarter, at 65 nanometer, how many customers you have really put down order? Shih-Wei Sun: At 65, we have so many customers engaging, at least --

The commercial output for how many people? It looks like a quite small number, it's only -- Shih-Wei Sun: Yes, the production... it's around 10 products in mass production and at least for the products in takeoff stage.

Thank you, Dr. Sun. Shih-Wei Sun: Thank you.

Thank you. There are currently no more questions in the queue. [Operator Instructions]. We have a question from Roland from JPMorgan. Roland, Please go ahead with your question.

Yes, regarding to your income tax rate in second quarter was pretty low, can you explain the reason behind that and how should model in 3Q?

Minimum tax in Taiwan currently is about 10%. And given that we have some tax credit for our cooperation, theoretically if most of our profit coming from cooperation, the tax rate should be... stay at a similar level like it is right now. But on the other hand, if we have more so called disposal income from the share divestment, that's a straight 10% tax, no credit to offset that. And the tax will become higher if we do that.

Thank you.

Thank you. There are no further questions. We can now begin closing comments. Mr. Liu, please go ahead.

Thank you. So I think that concludes our call today and thanks again for joining. If you have any further questions, please do not hesitate to contact us directly. And we will come back in the next quarter. Thank you. Operator, back to you.

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. You may now disconnect. Good bye.