Qidong Liu - CFO Shih-Wei Sun - CEO

Steve Pelayo - HSBC Mehdi Hosseini - FBR Pranab Sharma - Daiwa Securities Randy Abrams - Credit Suisse

Welcome everyone to UMC 2009 Q4 Earnings Call. (Operator Instructions). For your information, this conference call is now being broadcasted live over the internet. Web cast replay will be available within an hour after the conference is finished. Please visit our website www.umc.com under the Investor Relations, Investor Events section. I'd now like to introduce Mr. Qidong Liu, CFO of UMC. Mr. Liu, you may begin.

Thank you and welcome to UMC's conference call for the fourth quarter of 2009. With me today is the CEO of UMC, Shih-Wei Sun. During this conference we may take forward-looking statements based on management’s current expectation and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Including risks that are made beyond companies control for this release please refer to UMC's filing with the SEC in the U.S. and the ROC security authorities. Now let me begin with the financial numbers. For the fourth quarter of 2009 revenue increased 1.2% quarter-over-quarter to NT$27.75 billion from NT$27.41 billion in the quarter three '09, an increase of approximately 50% year-over-year from NT$18.54 billion in Q4 2008. Gross margin was 25.9% operating margin was 13.5%, net income was NT$4.4 billion and earnings per ordinary shares were NT$0.35. Our capital expenditure invested during the quarter were NT$10.19 billion, cash balance still increased to NT$52.79 billion due to a rise in net income in the second half of the year to NT$10.49 billion ending. For the full year of 2009, revenue decreased 4.2% year-over-year to NT$88.52 billion from NT$92.53 billion. Gross margin was 17.9%, operating margin was 3.8%, net income was NT$3.87 billion. Since the full year of 2009 remained profitable, with earnings per share of NT$0.31, the company plans to propose the distribution of dividends to shareholders and employee bonus in next board meeting. [With that detail] show summary for the result in Q4 '09 and full year 2009. More details are available in the quarterly report which has been post on our website. I’ll now turn the call over to Dr. Sun. Shih-Wei Sun: Thank you, Qidong. First of all Happy New Year. Thank you for joining us today, as always I appreciate your interest in UMC, I’ll start with some brief summary of UMC 2009 operating results and share with our general operating outlook. Then I’ll provide you with the guidance for the first quarter of 2010. Following this we will leave the rest of time to answer your questions. In 2009, UMC smoothly weathered the most severe economic recession in recent history. Moreover, we were one of the first foundries to have recovered from the downturn and posted the lowest decline in revenue resulting from the financial crisis compared to the other foundries. Looking to 2010, UMC shares the industries positive outlook on growth for the foundry sector. For 2010, UMC plans to increase CapEx to US$1.2 billion to US$1.5 billion to accommodate the robust demand we are seeing from customers for advanced technology to attain a reasonable balance between market share and the return on equity and to solidify UMC's stable long-term growth. Capital expenditure for 2010 will mainly be used to build capacity for advanced processes. We plan to boost the 45/40 nanometer process capacity and continue to introduce 28nm R&D and pilot production equipment at Fab12A in Tainan, as well as greatly expand the 65/55 nanometer process capacity at Fab12i in Singapore. In addition, we plan to accelerate the readiness timeframe of Fab12A's phase 3 cleanroom related facilities and equipment installation to meet demand for advanced technology capacity and provide for a more flexible expansion plan. At the same time, we will pay close attention to the pace of the continuing economic recovery and the successive adjustments of the U.S. and China's monetary policy. UMC will continue to diligently monitor economic conditions over the next several quarters and react prudently in accordance. Following UMC's Customer-Driven Foundry Solutions approach over the past year, we have engaged new customers while further enhancing our relationship with existing customers, and strengthened our ability to provide the best wafer foundry solutions. Percentage of revenue from advanced and the specialty processes has also increased with each quarter. In terms of 40 nanometer, UMC's independently developed a high-performance 40 nanometer logic process has not only helped the customers to beat the tape-out to production duration of the 65 nanometer generation by one quarter, but has also achieved a stable and predictable yields. This success has demonstrated that close cooperation between UMC and its customers for the 40 nanometer process can accelerate time-to-volume, satisfy customer demands for advanced processes and achieve win-win results. UMC will continue to expand its global presence and proceed with its overseas acquisitions; when finalized, this diversification of manufacturing locations will help customers mitigate geographical risk, increased economies of scale, and create synergies for the company's overall operational and the financial performance. Now let me provide you with the guidance for the first quarter of 2010. We expect the wafer shipments to be flat. Wafer ASP will decrease by less than 3% in US dollar terms. Currency appreciation will drive down NT dollar revenue by approximately 1% to 2%. Capacity utilization rate roughly in the high 80s range. In terms of our profitability, our gross margin would be in the mid-20s range which is adversely affected by the NT-dollar appreciation. The computer segment is expected to outperform other segments. The CapEx budget for 2010 is expected to be in the range of US$1.2 billion to US$1.5 billion. That concludes my comments. We are now ready for questions. Operator please open the lines up. Thank you.

We will now begin the question-and-answer session. (Operator Instructions). Your first question comes from the line of Steve Pelayo from HSBC. Please ask your question. Steve Pelayo - HSBC: Great, just a follow up on fourth quarter gross margins, they were down about 200 basis points, but your manufacturing depreciation was down about 5% quarter-on-quarter. We should have added about 170 basis points gross margin. So that really means those other manufacturing costs as a percent of revenue really held back the gross margin potential. Could you help me quantify what was going on there? I understand something from inventory employee bonus, just help me understand what were the impacts and were there any other negative impacts, yields or material costs or something else out there as well that were governing gross margins.

Pretty much you mentioned most of them, such as employee bonus as well as NT dollar appreciation against US dollars. So every 1% appreciation of NT dollars will drive down our gross margin by roughly 0.6% and in quarter four, NT dollars appreciated by 1.5% so that’s about half of the gross margin decline. (Inaudible) inventory. Steve Pelayo - HSBC: Okay and then. Sorry, go ahead and finish I am sorry.

Yeah, I am finished. Steve Pelayo - HSBC: Okay, and then I had asked a question earlier today about the potential to see this company 30% gross margin and you had said that was a good goal. And now, that I have come back and worked my module and applied your depreciation guidance down about 10% or so year-on-year. I see that actually its being very possible even in the next couple of quarters or so, am I missing something here or do you think or is that really a stretch call?

We however can not really give full year guidance. So for the time being what we can do is to give you a quarterly guidance and last year in '09 we did have gross margin of 27.9 in the third quarter. And we see follow-up for the year as mentioned by our CEO today in afternoon conference. 30% or our yield 10% will definitely for our goal to work for. Steve Pelayo - HSBC: While if I use that as a comparison then you would get about 200 or 300 basis points higher on the lower depreciation and you get about 200 or 300 basis points higher than what you did on the variable part as well. So that then does put you over 30% gross margin. So help me understand am I thinking about that correctly?

Again as a matter of fact you mentioned about Q1 (inaudible) for the rest of the year including anti-dollar appreciation, as well as higher and [so we] bonus for the whole year of 2010. Steve Pelayo - HSBC: Okay so maybe whatever you save in depreciation could still be actually spent in other areas. Excellent, thank you.

Your next question comes from the line of Mehdi Hosseini from FBR. Please ask your question. Mehdi Hosseini from FBR, your line is open. Mehdi Hosseini - FBR: Couple of question regarding capacity. Can you help me understand what the mix of 40 nanometer capacity would be by the end of this year and number two, is this CapEx front end loaded or is it equally distributed throughout the year and I have a follow-up. Shih-Wei Sun: So the capacity in the CapEx is you are correct pretty much front end loaded. So what's the first question? Mehdi Hosseini - FBR: The mix of 40 nanometer. Shih-Wei Sun: The 45 nanometer and the 40 nanometer capacity insurance (inaudible) percentage of overall UMC capacity. It's about 3% by the end of the year. Mehdi Hosseini - FBR: So if that's the case, imagine you want to continue to increase this. Should we assume that the CapEx or capital intensity is going to continue into 2011 and given the increasing equipment lead times especially on the emerging lithography, should we also assume that you are going to continue to place equipment orders throughout second half to make sure that equipment delivery is going to be there, especially for next year. Shih-Wei Sun: So our [capital] intensity mentioned in the afternoon from a three to four year cumulative average point of view, it’s a stay about within 25%. So you are asking the second half of this year how are we going to continue the capacity expansion to the next year, so its we are working on that. So again, that's our rolling kind of effort for UMC for a non-cut staff down. (Inaudible) in terms of the lead time, I think we have procured sufficient immersion lithography to at this moment. Mehdi Hosseini - FBR: And what is your view regarding competition from outside the Taiwan. There has been a lot of noise in the headlines, but how do you assess 40 nanometer competition outside of Taiwan from your point of view? Shih-Wei Sun: I already commented on the [CME] I mentioned earlier for 40 nanometer, we are working on high performance and low power. High performance, we had a press release about two weeks ago. So we are shipping thousands of wafers per quarter, for the high performance process with 12 immersion layers. With a very predictably year and also we actually I mentioned already, we actually (inaudible) tape out the production duration by one quarter compared with 65 nanometers, so it's well on our way. In terms of the competition, I don't have any comment.

(Operator Instructions). Your next question comes from the line of Pranab Sharma from Daiwa Securities. Please ask your question. Pranab Sharma - Daiwa Securities: My first question is what type of dividend you are going to pay on 2009 earnings, any thought on that side?

Our EPS for 2009 is around NT$0.31 and we have some surplus from previous years in terms of return and all put together we will submit our proposal to our board next month. So I can only give you a clear senses in March. But we are likely to pay up as much as cash as possible. Pranab Sharma - Daiwa Securities: Would you go for above 100% payout?

I cannot really comment on that until our Board give their approval. Pranab Sharma - Daiwa Securities: Qidong you also mentioned depreciation expenses for whole year 2010 will be down by 10% year-on-year so that is?

Roughly 9% to 10%. Pranab Sharma - Daiwa Securities: But if despite your increasing CapEx by threefold right?

Yes and the rate of decline where our starter seller rate starting from mid of this year. Next quarter we won't see too much may be 1% also of decline. Pranab Sharma - Daiwa Securities: Q1 1% Q-on-Q down. Okay got it. Could you give us for modeling purposes what should be the tax rate for 2010?

Shouldn’t be too way off last year which was 13% I think it will be somewhat in line with 10% minimal tax rate. Pranab Sharma - Daiwa Securities: And another question is on your investment on the LED side there are some of the press articles are going on. Can you elaborate like how much money you are going to invest in 2010 in this particular business and what type of revenue contribution you are expecting in 2010?

For the past few quarters, we actually briefly touched upon our investment in the green energy field. Basically we set up investment company with [operating] cash flow of NT$1.5 billion and with two focus, one is our LED related, the other one is solar energy related and both we are doing at small scale type like a supply chain type of our security meaning upstream, midstream and downstream type of smaller investment. And if you follow our announcement over the past few months, we announced this, we pretty much build up the whole supply chain in both LED and solar already and going forward in the near term and the new investment probably won't be too many. And therefore we will start to see some minor impact on new investment but current stage is still kind of as I mentioned supply chain build up we won't spend too much profit or revenue contribution in 2010. Pranab Sharma - Daiwa Securities: And the last question in the 40 nanometer, can you give me some color, when you expect 40 nanometer account, at least 5% of your revenue? Shih-Wei Sun: I can only comment the first half of probably they would still be on the lower single digit. If I mentioned already we are engaging with over dozen customers intensively on the IP verification product modification stage et cetera, et cetera. So depend on the progress of those programs. Technology wise these are pretty much there already.

Thank you. Your next questions comes on the line of Randy Abrams from Credit Suisse, please ask your question. Randy Abrams - Credit Suisse: Yes good evening I turned a little bit late but wanted to clarify on the buy back you announced today I think another 300 million shares in the buy back from last year you have not finished it. So I wanted to understand what the buy back fully for employee bonus or reserve factor that you want to buy in and retire shares. So if you could walk through your buy back. And just with the large cash balance, do you plan some to step it up even just for purchase for purpose of buying back and retiring shares?

Well you understand I seem fairly practicing since our share buy back either retired in or returns back to employee if there is opportunity. Last buy back we did at the end of 2008 beginning of 2009 were 100% completed and we brought approximately trends for half of the, as charge your shares to employee at the end of 2009. And this run the new run also is going to be 300 million shares. Although the share price has been higher but given all ample of cash on hand we still decide to buy back and with the intention to transfer to employee if there is opportunity over the course of next two to three years. Its not that we certainly carried higher than which will also be good things in terms of shareholders equity. And going forward, we will continue to monitor any opportunity to see if we can continue with this buyback purchase. Randy Abrams - Credit Suisse: And for the pricing, where its coming down a bit less than 3%, is that from a normal kind of new year price reset or product mix and as we go into next couple of quarters where 40 nanometer will still be relatively low, do you expect a still mild decline trend for blended pricing in the next couple of quarters as well? Shih-Wei Sun: Actually possibly the slight decline in Q1 blended ASP is merely from, you can say you understand if today is currently under the supply constraint situation and we certainly prefer to run more advanced for example 65 nanometer. However, each customer has their preferred profile of technology notes they would like UMC to support. So at this moment our priority is to support customer the best we can. So that caused the mix to shift, there was a mixed shit towards the larger geometry that’s the main reason for the decline. So, in Q2 we expect the situation should be much better. Randy Abrams - Credit Suisse: Okay and for your current gross margin profile, in second quarter is that a better lift for just gross margin where 65 nanometer now support is better than 90 and 130? Shih-Wei Sun: I don’t have the Q2 number yet but the 65 percentage should continue to grow pretty fast. Randy Abrams - Credit Suisse: But is the gross margin percent, like little more profitable node now or 65 relative to 90 and 130 like what you've got a positive gross margin impact if that mix shifts back towards meeting [edge]?

(Inaudible) equipment certainly the mature ones more depreciation taken the margin for the time being, the mature note is slightly better than the (inaudible). However if you use more advanced equipment to produce less of the advanced note, then the margin will not be as good as it should be. So I think a little bit complicated. Shih-Wei Sun: Actually (inaudible) 65 and the 90 nanometer this year are pretty high portion of our comment to us. So we definitely prefer to around more 65 nanometer in our capacity mix. Randy Abrams - Credit Suisse: Okay, makes sense. Okay, the last question I had was on the IDM mix. At one time it was running at what 35% to 40% of sales and now down to 20%. Some of that's from just the industry shift at (inaudible) but is there a potential, I mean as we go into the upturn or do you see any new IDMs there getting tighter in house and just seeing that part of the business start to rebound or do you think there is any rebound still to come from that part of the market or do you think its just a long-term industry shift that we won’t get that as much in the cycle. Shih-Wei Sun: So for the leading edge technologies IDMs have already been found running the advanced technologies out to foundries for quite a while. For that portion I don’t see there is any big change. So we are also seeing IDM companies are starting foundry out the legacy technologies for example, (inaudible). So I think for us this is just a general trend that we see more and more linked in.

You have a follow up questions from the line of Steve Pelayo from HSBC. Please ask your question. Steve Pelayo - HSBC: Yeah just a quick one, with your front end loading of capital spending this year, it looks like if I’m calculating its correct, you’d likely be free cash-flow negative in Q1 or Q2 or both? Am I understanding that correctly?

Well, depreciation alone will be close to NT$0.9 billion. For the profit with depreciation, we believe is going to well hover our proposed NT$1.2 billion to NT$1.5 billion CapEx. So it shouldn’t be mainly free cash flow. If we are saying the strong and loaded I believe Patterson was referring to the older base CapEx. In terms of cash payment, most of the case there will be a few months afterwards. So we don’t expect to see a net of free cash flow for 2010. Steve Pelayo - HSBC: Okay so I’ll sum it out, my actual cash based CapEx and also keep your free cash flow. The last question I had is on, you guided today that your year ending 2010 capacity would grow about 12% versus year ending 2009, and you said 300 millimeter would grow 25%. When you play around the map on that, it actually means that your 200 millimeter capacity is still going to grow I think 5% or 6% or so. Is that correct and where are you expanding 8 inch?

I don’t have exactly the numbers in front of me. Actually I can't comment on the 8 inch. 8 inch we are also you can see we are also investing. For most of the owned technology mix transitioning from older technologies, pushing technology mix to 0.13 and 0.11 (inaudible) technology. So probably we have to follow-up with you on the exact numbers. Shih-Wei Sun: You are right. There are certainly some increase in age, capacity as well. Randy Abrams - Credit Suisse: Fab has a room for that increase or I guess, since its really just conversion, wait, its actually running more wafers. So that means more equipment in the fab. Which fab has room to grow like that?

Since it’s a stretch out effort we just tried to stretch more capacity. Randy Abrams - Credit Suisse: Alright. Now I understand. Thank you. If I could sneak in one more, any more progress on the AGN potential and also talk about Japan consolidation. How that changes anything in your strategy or financial footprint?

Well first the goal is really to enlarge our operating scale to gain the benefit of economy upscale. And merging again we will expect to see some 8% to 10% addition in capacity, about 5% coming from UMC Japan. As for the (inaudible), UMC Japan is going to have shareholders meeting on the February 18th after that we will start the so called de-listing process. Hopefully everything can me merged back by the mid of 2010. As for (inaudible) still after the Taiwan governments revised regulation and they start to become a bit more vocal recently about the coming up relaxation about investment in China semiconductor industry, but we’re still waiting for their revision.

(Operator Instructions). You have the follow-up questions coming from the line of Mehdi Hosseini from FBR. Please ask your question. Mehdi Hosseini - FBR: Can you please comment on or share with us your opinion about your customers inventory and the inventories that are in the form of finished wafer or [dye bank], is there a concern, or how do you assess that? Shih-Wei Sun: As I said neither of one first we don't have any either (inaudible) or Taiwan at UMC [pretty much to zero], so and therefore as far as the overall inventory situation, we believe Q3 last year, the inventory from all customers side based on our understanding had pretty much reached the bottom. So starting in Q4, we are seeing some inching up of the inventory level, probably incorporation for the Chinese New Year; however the level is still quite a reasonable level. As far as the channel inventory, Q4, the sales through Christmas time should be pretty good. So the channel inventory has been way under control again and also today our factories are pretty much quite busy, very full. So the demand has been very strong, so almost speaking we are looking for, looking to a very good 2010 on the foundry side. Mehdi Hosseini - FBR: So if the (inaudible) during the lunar New Year holidays comes in, in line or even better and with lean inventories, do you see a scenario where your customers come back to you late February early March with expedited orders and with increasing role in forecast shipment in Q2 or do you see I was just going to finish that question or statement. Or do you already see your rolling forecast by shipment in Q2 already dialing or discounting a pretty good sell through?

For the Chinese New Year sales through we have to wait its two weeks away but today our order and booking situation is just phenomenal just to learn these in the other factory sale in the marginal (inaudible). Mehdi Hosseini - FBR: Just as one to follow up if the sell through during the Chinese New Year is good would and given the fact that utilization rates are pretty high would that give you any ability to help increase prices?

No we are not discussing that at this moment resale customers. And looking at the pricing situation case by case also premium margin on a long term basis. Mehdi Hosseini - FBR: I am just trying to better understand the supply and demand environment if it is going to take sometime for capacity to be added and inventory refresh restock is going to happen in Q2 and utilization rates over the above 90% then second customers, top customers that we want to expedite how will they be able to do that. Shih-Wei Sun: It’s a very difficult situation today we are trying very hard for resale customers so case by case base its very difficult.

Thank you, you have a follow-up question from Pranab Sharma from Daiwa Securities. Please ask your question. Pranab Sharma - Daiwa Securities: Thank you for taking my follow-up. My question is what type of over booking or extra booking you are seeing now and how many customers like particularly you have to say like you have to wait for few months to get delivered because our orders are booked. In that case how you are managing to keep those customer in your hand whether they are going to some other foundries out of you. Shih-Wei Sun: The answer is similar to the previous question. We are seeing a very difficult situation I believe this situation is across the board in foundry section today. So we have to work with this customer on case-by-case basis, understand for example if they are single source with us. How we can work together sharing limited resources together to go through this difficult situation. Pranab Sharma - Daiwa Securities: Its fair to say like you have more than 20% of over booking than what is your capacity is telling you now? Shih-Wei Sun: As I have a number of those, it’s a very difficult, there is a big gap also the technology notes especially the leading edge. Pranab Sharma - Daiwa Securities: And which are the technology node, you have little bit of weakness because your iteration rate is still in mid-80s that’s why you are guiding and probably Q2 might reach 90s. So where you have some unused capacity? Shih-Wei Sun: Our legacy 8-inch but they are also getting busy these days. Pranab Sharma - Daiwa Securities: These days, okay. So that means as in when we move to Q2 we might see 100% inflation rate across the board? Shih-Wei Sun: No, we guided high-80s. Pranab Sharma - Daiwa Securities: That is for Q1? Shih-Wei Sun: For Q1, Q2 is another number I don’t have the number as of today. Pranab Sharma - Daiwa Securities: Okay and how we will see the Q1 like it will be monthly momentum will be towards the backend of that or it will be quite flat toward monthly sales for Q1? Shih-Wei Sun: Well February short working days and also Chinese New Year except our 8-inch wafer fabs still have short annual maintenance scheduled so it will be at this February. Pranab Sharma - Daiwa Securities: And March it could be better than January that’s a normal trend right? Shih-Wei Sun: It should be yes.

Thank you. There are no further questions at this time please continue.

Okay if there is no other question we will like to conclude our call today and thank you again for your interest in UMC please feel free to contact us directly if you have additional questions. 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 section. You may now disconnect good bye.