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AU Optronics (NYSE:AUO)

Q1 2006 Earnings Conference Call

April 20th, 8.00AM

Executives:

Julie Chan, Senior Manager, Finance

Dr. Hui Hsiung, Executive Vice President

Max Cheng, Vice President and Chief Financial Officer

Dr. David Su, Vice President and General Manager, Consumer Electronics Display

Dr. Paul Peng, Vice President and General Manager, Information Technology Display

Analysts:

C.J. Muse, Lehman Brothers

George Chang, Citigroup

Wanli Wang, Credit Suisse First Boston

Helen Long, Unidentified

Ling Len(?), JP Morgan

Steven Su(?), Unidentified

Andrew Abrams, Avian Securities

Joe Lock(?), Pantera Capital

Ivan Goh, Dresdner Kleinwort

Presentation

Operator

Welcome to the AU Optronics Corp Q1 2006 results conference call. Operator instructions. I would now like to turn the call over to Julie Chan, Senior Manager of the Finance division. Please proceed.

Julie Chan, Senior Manager, Finance

Thank you. Good morning and good evening to all participants. This is Julie Chan. With me here we have Dr. Hui Hsiung, Executive VP, Mr. Max Cheng, our CFO, Dr. David Su, VP and General Manager of the Consumer Electronics Display business group and Dr. Paul Peng, VP and General Manager of Information Technology Display business group.

Before we begin, I would like to state that management’s comments about AUO’s current expectation made during this conference call are forward-looking statements, subject to significant risks and uncertainties, and that actual results may differ materially from those contained in the forward-looking statements. The financial results we are discussing today have been prepared on a consolidated basis, in accordance with accounting principles generally accepted in Taiwan, ROC GAAP.

You should be cautioned that these accounting principles differ in many respects from the U.S. GAAP. Information as to those factors that would cause actual results to differ materially from AUO’s forward-looking statements may be found in AUO’s Annual Report on Form 20-F, filed with the U.S. Securities and Exchange Commission. AUO undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Please do take a few minutes to read the disclaimers.

Now we will take the next hour or so to review our Q1 earnings results, discuss some of the performance highlights and the trend in the industry and conclude with our outlook for the next quarter. After that, we will take your questions. Please turn to slide number three of our presentation material.

In Q1 overall, the industry experienced a seasonal weakness as well as a supply-demand imbalance. (Ship notes?) are pretty much in line to our initial guidance, but pricing was a bit weaker than we anticipated. ASP by area declined about 11.9% sequentially, more than we had anticipated. However, March flat-panel shipments were 9.4 million, declined 2.3% QoverQ. More medium-size panels, however, did better than normal seasonality at a moderate 0.8% QoverQ decline. We shipped 15.8 million. For Q1 2006, AUO's unaudited consolidated revenue totaled NT$66.3 billion, equivalent to US $2 billion. This represents a 9% QoverQ decrease. Our operating income was NT$7.9 billion, which was about a 36.4% decline from the NT$12.5 billion in the previous quarter.

The income in Q1 2006 posted NT$6.7 billion, and represents 42% QoverQ decline. This brings our basic EPS to NT$1.14 per common share and about US $0.35 per ADS for the quarter. The higher than expected PC panel price declined was mitigated by better product mix and continuous improvement on our operating efficiency and cost structure. As a result, we reported 16.7% gross margin, 12% operating profit margin, 10% net margin and an EBITDA margin posted at 27.9%. This declined from the 31.3% in the previous quarter. Next slide, slide number 4 on the balance sheet highlights. During this quarter, cash and short-term investment decreased slightly by 7% QoverQ from the NT$27.9 billion to NT$25.9 billion. Just like our Q1 guidance, inventory turnover date increased from 28 days to a healthier 35 days, to support the about one month production cycle we have. Inventory in the absolute dollar therefore increased 18% QoverQ to NT$22.7 billion. AUO's debt to equity ratio was 60% and net debt to equity ratio ended up at 45.2%, but both are similar to Q4 2005.

Next slide, slide number five, cash flow highlights. During the quarter, AUO generated NT$30.4 billion operating cash inflow, mainly from net income of NT$ 6.7 billion and depreciation and amortization of NT$10.5 billion. Net cash used in investing activity totaled NT$19.6 billion mainly for the capital expenditure of NT$19 billion. Net financing totaled NT$3.9 billion. These were attributable to the issuance of a new corporate bond at NT$5 billion, offset slightly by the decrease in the net debt of NT$1.1 billion. As a result, AUO ended the quarter with a net cash outflow of NT$2.2 billion. Now let's look at our business analysis, slide number six. Application breakdown from the revenue basis.

Our business trend in Q2 just like we guided earlier, PC accounted for about 52% of our revenue, guiding more than half of our revenue. And among them, 37% are monitors, 15% are notebooks. TV in this quarter improved the most. Japan is the main business driver for AUO. On an absolute dollar comparison, LCD TV increased about 20% QoverQ at 344% worldwide. As a result, TV accounted for 35% of our total revenue in this quarter. Audio/video display and general display account for a steady 11% and 2% of our business. Together, now PC represents 48% of our revenue.

Let's move to slide number seven, unit shipment and blended ASP of AUO's large size panels. Unit shipment of the large size panels had a modest 2.1% decrease from 9.6 million in the previous quarter to 9.4 million this quarter. Blended ASP declined by about 3.96% sequentially from US $202 to US $194. Next slide, slide number eight, ASP analysis of our large size panel. ASP on the PC panel experienced a substantial 40.7% decrease from US $170 to US $145. Meanwhile, the ASP for TV improved about 4.9% for AUO from US $385 to US $404, supported by enhanced shipments to 32(?) and 37(?) LCD TV.

Slide number nine. From the per square meter perspective, blended ASP per square meter decreased 11.9% QoverQ to US $1800.92 in this quarter's March shipment. This increased 4.4% QoverQ from 1,031k square meters to 1,076k square meters. Slide number 10, small and medium-size panels. In this quarter, ASP of our small and medium-size panel took a 6.3% decrease, but shipment posted better than normal seasonality, remaining at 15.8 million, about a similar level over Q4 2005. Next slide, slide number 11, AUO's monthly capacity by fab(?). For our June quarter, we expect AUO's estimated monthly capacity by each Gen to be (Gen C 0.5?) to remain at 5k for low temperature polysilicate and 65k for amorphous silicon. And the remaining 60k sheet for LCD.

For our Gen 4(?), 60k and in Gen 5 together combined the three fabs, we would have 180k in the month of June. For Gen 6, 100k and then for Gen 7.5, equipment currently are both in and the ramping up schedule remains to be October. We expect to have 10k monthly capacity by year-end. Next slide. As you know, AUO has recently announced acquiring QDI. We are pleased to share the benefit this merger will bring AUO by using these slides. Slide number 12, capacity buying up post-merger. Market share normally was 45, revenue, capacity, or capacity first and then revenue and profit of a company. Gen 5 and 6 are said to be pretty important to the size of Gen in supporting mainstream products today and for the upcoming few years.

QDI has one Gen 3.5, one Gen 5 and one Gen 6 fab. Its trading today, in-store capacity of Gen 6 will be 60k at year-end of 2006. As you can see, its Gen 3.5 represents only 8% of total capacity in the area. In QDI, area install capacity by year-end is about one-third of that of AUO's. And with a capex that is much lower than building a new Gen 6 from scratch, QDI's Gen 6 can ramp from a 60K to a 120k(?). By then, QDI will bring in about 61% of AUO's year-end capacity in area. So overall, from this chart, QDI can help AUO increase its area capacity 33% to 51% per area per AUO's year-end installed capacity of course. And from the paying capital perspective, acquiring QDI with the 3.5 over 1 swap share ratio, it will increase AUO's paid in capital by 14.7 billion, an additional NT$6 billion(?) assuming the CD conversion would take place and that would increase AUO's paying capital in the neighborhood of 24% to 26% in exchange for the additional 33% to 51% capacity as we walked through earlier.

And it will bring additional revenue and profit. QDI can offer AUO also an extensive product and technology portfolio. And lastly, based on the current business outlook, management expects AUO's Q2 2006 performance as follows. For large size panel shipments, expect it to increase by low teens percentage points QoverQ. We do expect PC shipments to increase by high single digit percentage points. TV shipments also increased by about 20% QoverQ. Small and medium panel shipments are expected to increase by about 30% QoverQ. For the pricing, blended ASP QoverQ comparison, we expect PC unit price to stabilize in Q2, but the blended ASP is expected to decline about 10%. For the TV, blended ASP is expected declined by mid single digit percentage points. For our fab loading, we do expect overall old fab to be over 95% loaded. This ends our presentation for today and we shall open the floor for questions. Operator?

Questions and Answers

Operator

Operator instructions. Your first question comes from the line of CJ Muse, Lehman Brothers. Please proceed sir.

Q - C.J. Muse, Lehman Brothers

Good evening. I guess two quick questions. First, I was hoping you could talk about your panel inventory and what kind of change you saw QoverQ and what your expectations are looking into the June quarter and then into the second half?

A - Max Cheng

This is Max Cheng. I will try to answer your question about inventory. For the finished goods, I guess for the Q1, we increased a little bit compared to Q4 last year. I guess the turnover days might increase about three days from nine to 12 days in Q1. All the other things would be quite similar to Q4 for the raw material and we definitely would increase a little bit due to an OE change in the shipment by air to by sea, which also could reduce some of our shipping costs for Q1 this year. Basically that is the information we can provide at this moment.

Q - C.J. Muse, Lehman Brothers

OK. Can you tell us what your utilization rates were and how that changed from Q4 to Q1?

A - Max Cheng

I guess for Q4, they will be pretty close to 100%, but, well, for Q1, this is about a 95 to 97. I think that is the going rate.

Q - C.J. Muse, Lehman Brothers

And last question, could you tell us what percentage of your overall TV shipments were 32 inch and above?

A - Max Cheng

Raw material?

A - David Su

Yes. This is David Su. For our TV shipments for the Q1, 32 inch and above is around I'd say, close to 50%.

Q - C.J. Muse, Lehman Brothers

15 or 50?

A - David Su

50. About 47%.

Q - C.J. Muse, Lehman Brothers

And how does that compare to the last quarter?

A - David Su

Last quarter is around 39%, around 40%. So it is an increase.

Q - C.J. Muse, Lehman Brothers

Perfect. Thank you very much.

Operator

Your next question comes from the line of George Chang, with Citigroup. Please proceed.

Q - George Chang, Citigroup

Hello guys. I have a couple of questions. Number one is on capex. Looking at the slide, it seems like you guys want to expand on QDI's Gen 6 and also at the same time compared to last quarter, it seems like you are slowing down a little bit on your own Gen 5 and Gen6. So can you perhaps comment a little bit on your capex? How is that going to change from the NT$90 billion that you announced previously? And the second question is, it seems like your Q1 cost reduction is a little bit less compared to Q4. Max, can you comment that whether we are going to see the cost reduction decelerate going forward because the yield rate has improved so much. Or actually

are we going to see an improvement QoverQ into Q2?

A - Max Cheng

OK. The first question about capex, I guess for this year we stick to the same number, say about NT$90-95 billion. We didn't change the capex for the whole year at this moment. Regarding your question about the number of our Gen 5, it seems you know, quite a little bit different from our previous quarter's announcement. I guess that just you know, we changed the move-in schedule a little bit. So basically we didn't change the entire capex amount at this moment. For the second question, yes, every quarter, we have talked about 3-5% cost down every quarter. We try to keep that kind of a target even going to Q2 this year, but of course you know, I agree with you. It's getting tougher and tougher, but yes we will try to meet that no matter what. Basically that is my comment.

Q - George Chang, Citigroup

Do you think cost reduction in Q2 will be more than your Q1 because now you're becoming a bigger entity, you have more bargaining power?

A - Max Cheng

I guess, you know, the consolidation would take a while before we see a good result. So I will say Q2, you know, it's just like Q1, the two companies are going to try to sit together and work together for the cost down project. So I would say it might take a little bit longer. For this quarter, we will try to just keep our own path, try to keep the target we just mentioned. For the synergy of the consolidation, I will say it might take a little bit longer.

Q - George Chang, Citigroup

So, Max, you suggest that we should model a similar cost reduction Q2 then?

A - Max Cheng

Yes.

Q - George Chang, Citigroup

Thanks. OK. Also on the capex, sorry just very quick, because looking at the slide, it seems like there is a phase two of QDI. So I don't know if that's this year's plan or that's a long-term plan? (inaudible)

A - Max Cheng

I guess you know, that would be next year's plan.

Q - George Chang, Citigroup

Right. So that's next year's plan?

A - Max Cheng

That's right.

Q - George Chang, Citigroup

OK. So you are not spending any money on QDI capacity this year?

A - Max Cheng

No. I guess the capex amount, about NT$20 billion for QDA. For this year, it will be only for the capacity expansion to 60k of the Gen 6 (inaudible).

Q - George Chang, Citigroup

So to 120k, that is totally next year's plan?

A - Max Cheng

Exactly.

Q - George Chang, Citigroup

OK. Thanks, Max.

Operator

And your next question comes from the line of Wanli Wang with Credit Suisse. You may proceed.

Q - Wanli Wang, Credit Suisse First Boston

Hi, Max. Just one question. With the magnitude of ASP you indicated for Q2 ASP drop, and also the shipments up, is it fair to say that we can see the Q2 AUO revenue still going up by low single digit numbers QoverQ? That is my question.

A - Julie Chan

You know what, in local practice, in our ROC, we kind of do not really guide. If we guide revenue, we are forced to give forward-looking forecast for the whole year and therefore we need to do it in our pricing and shipments. So perhaps you can use that and work from that over there. OK?

Q - Wanli Wang, Credit Suisse First Boston

OK. Thank you.

Operator

And your next question comes from the line of Helen Long(?). Please proceed.

Q - Helen Long(?)

Hi. Thank you for taking my question. The first question is regarding your guidance. Can you help me better understand your inner price guidance of 5-10% decline? I think we have already seen around 7-10% decline in this month. So would your internal price guidance then imply some price recovery later passing this quarter?

A - Hui Hsiung

Helen, this is Hui Hsiung answering your question. Actually the price that we guided for blended, actually is blended ASP. In terms of the unit price for PC, it depends on the size of course, but probably in the range of 10-15% . For TV, we will stay similar to Q1 5-10% range. In fact, if you see in Q1, the panel prices have dropped more. Actually during Q2 it dropped less and vice versa.

Q - Helen Long(?)

And do you have any feelings for the second half this year? Historically, typically we get price recovery for PC panels and should we expect the same for consumer applications such as TV?

A - Hui Hsiung

For PC, yes, we do. We do expect some degree of recovery during the second half and for TV, we do not. At least we do not anticipate any recovery. Probably what we can say is that throughout the year we expect an annual decline of say around 25% and apparently during the first half, it tends to decline more than the regular pace. So perhaps, that indicates a second half where the quarterly decline will be to a lesser degree.

Q - Helen Long(?)

My last question is regarding the QDI acquisition. Can you help me understand the thinking behind the decision to spend? I think it is US $3-4 billion in the acquisition instead of spending the money in an AG(?) fab. Wouldn't an AG(?) fab give you the flexibility to make say 50 inch panels and also say down to 32 inch panels if indeed there is not a big enough market for 50 inch and larger size TVs?

A - Hui Hsiung

Helen, yes, your comment is correct. We think, at this point, that two issues with Gen 8. One, we think the market is not quite ready for, in terms of the total volume for 50+ inch TVs, especially it has to compete with TV flat-panel display. So to some disadvantage in terms of cost. Second, we think that Gen 8, there is still some technology needs to be worked out. In particular, for example, the ink jet printed color filter that people are still working on. So we think it's a little bit premature to invest at this point. On the other hand, the QDI acquisition, the quality of the capacity, including the second phase of Gen 6 that we intend to have next year, I think it can be very effective in terms of the 32-37 inch market that we expect to be strong now and next year. So it is also the cost is pretty competitive. So we think almost with no ramp up time, no lead time, we think this is really the most effective capacity expansion for us. In other words, I think that, other than the capital, actually through other issues we have to deal with in terms of organic growth. For example, the engineers see the necessary learning curve for new Gen fabs. So all this we think makes organic growth less effective compared to the acquisition.

Q - Helen Long(?)

At this point, Gen 6 seems to be much more economical then Gen 8, but is it possible that say two, three years down the road that Gen 8 actually becoming more cost competitive than Gen 6 after people overcome the technology barrier? And that's all my questions. Thank you very much.

A - Hui Hsiung

I believe after, for the TV production, you can talk about Gen 6 or Gen 7and Gen 8. They are pretty much optimized for a particular size range. In terms of cost advantage, at least as far as we can see now, it is not geared for the better cost advantages we go for. Larger size for the same price panels. In addition, I think rather it's… for example, Gen 6 is optimized for 30 something inches and Gen 7 has an optimization to 40 something inch and Gen 8 is optimized for 50 inch. So it is more for particular size range then compared to in the past. We say okay newer generation means new cost. There are a lot of reasons for this. One reason is the cost structure. The fixed cost is actually a much smaller percentage compared to the earlier fabs. So that is our end, so I believe Gen 6 produce 32 or 37 compared to Gen 8 produced to the same range. It wouldn't have any cost disadvantage even two or three years down the road.

Q - Helen Long(?)

Thank you. That's very helpful.

Operator

And your next question comes from the line of Ling Len(?) with JP Morgan. Please proceed.

Q - Ling Len(?), JP Morgan

Hi guys. Can you talk about more on your cost saving and operating expense. We see great change. (High shedding costs both ways?) will occur in operating expense. Is it one time or is it going to be that way in the future? And secondly, how do you reach that 20 (TV inch due to a drop in the second quarter?) Supposedly you should go up as the TV size migrates. Can you elaborate more on that? Thank you.

A - Max Cheng

This is Max. I will answer the first question. For the Q1, yes, the opex, I mean operating expenses is much smaller than Q4 last year. I guess that is due to some reason. First of all, like I mentioned earlier, the logisticals, we said you know that the shipment costs have been reduced quite a substantial amount and also for Q1, we do not have any new fab to ramp up. So we also saved a lot of our costs. But from Q2, I guess we are back to the ramping up of (QS, we're checking?) and we're going to try to test our Gen7.5 from the second half of Q2. So I guess the operating expenses will go back to maybe like a 5% or a little bit more for Q2. That will be my answer for the first question.

A - David Su

This is David. For the blended ASP decline, mainly I think it's due to the larger sizes panel. Actually from Q4 to Q1, we had no increase in the 37 inch and for Q2, we expect, because the 37 inch is certainly to increase proportion wise compared with 32, it's kind of most stabilized. Plus the prices for each particular size panel is a continuous decline. So that's going to reflect the blended ASP as a mid single digit drop.

A - Max Cheng

I guess you know for Q2 and Q1, the product mix, I mean the TV product mix will be quite similar, even though I believe our 37 will be a little bit higher. If we are talking about 42 inch then I would say that would be the second half story. So at that time, we will see another kind of a migration, but that will be Q4 this year.

A - Julie Chan

Operator?

Operator

Yes, your next question from the line of Steven Su, sir you may proceed.

Q - Steven Su(?)

Hi. Thanks for taking my question. I've got a couple of questions related to the merger with QDI. In particular, I was wondering if you guys can comment on your due diligence process in exploring that transaction and two, if you can give us a sense of what level of I guess customer overlap there might be between your two organizations? And finally, if you can give us a sense of the level of synergies that might come out of this transaction?

A - Hui Hsiung

OK. This is Hui Hsiung. I think that customer overlap mostly occurs in the notebook applications. Actually we have - they don't overlap in the TV application or monitor application. There's very little overlap and the medium to small size, almost no overlap. Regarding the notebook applications, certainly the big top three notebook brands, we have the biggest overlap. That potentially of course the combined share for those customers maybe will suffer a few percentage. That we need to work on so that we don't lose any shares amounted through customers. But other than that, I think that it is complementary. So for some of the TV, we have complementary type customers. So that actually is additional business bringing after the combination. In terms of synergies, I think really the most apparent one is the completion of the capacity. For example, after the merger, both Gen 5 and Gen 6 are pretty much, we have the largest capacity worldwide. This Gen 5 is very good for notebook and monitor application and Gen 6 is very good for TV, as well as some larger size monitors. So this covers a majority of the business. We also have the largest Gen 3.5 capacity. It happens that, without the merger, actually we have some problems in terms of we have already seen some limitation in our capacity for medium and small size. For example, in the second half of this year, two of our Gen 3.5 fabs will be full for medium/small size and the other fab, the first fab, also starts to be occupied. That means next year we will have a shortage in terms of Gen3.5 generation for medium/small size. Now we have the addition of one more Gen3.5 fab that satisfies that void. In terms of the technology, we have some complementary technology. I think QDI has a pretty complete notebook product line with notebook technologies. So that is a good synergy. I think AUO has a pretty good TV technology, monitor technology, as well as medium/small size. So that part is also complementary. I think after the merger, in terms of position in capacity, now we are on par with the two leading Korean companies, really within 1% difference among the top three players. That can be translated into our bargaining powers in both the pipeline or also the downstream bargaining. That also has almost an immediate profit in taxes.

Q - Steven Su(?)

Is there any I guess overlap in the factories in your ability to do kind of extract costs out of the two businesses? Are there opportunities to consolidate the back office or…

A - Hui Hsiung

Yes, I think previously for some of the products, actually we are not necessarily, because of pretty much on the AUO side, we have been running the fabs at pretty highly loaded, up to now and as a result, some of the product actually is not producing the most economical fabs. For example we still produce some of the notebook in generation 3.5 fabs. That we would like to move to Gen 5. I think in terms of the allocation of production, we can be much more efficient with additional pretty high-quality fab capacity.

Q - Steven Su(?)

OK. Great. Thank you for taking my questions.

Operator

Your next question comes now from the line of Andrew Abrams with Avian Securities. Please proceed.

Q - Andrew Abrams, Avian Securities

Hi. I wonder if you could talk a little bit about the take rates for the World Cup and the associated inventories at the OEM level. It has been rumored around that there has been some inventory out there in the field and that World Cup take has been a little on the light side. Have you guys seen anything similar to that?

A - David Su

Yes. This is David. For the European market, especially for OEM makers of all the second brands, certainly there is some, especially in January and February, there is some tie up in the inventory and our latest information shows in March time frame the inventory, it kind of starts to reduce now. And so I think the World Cup certainly had some effect but for second brands, certainly now they are in, for their inventory now is dropping. However, for the first brand, the inventory actually is quite healthy for the first brand, their product lineup.

Q - Andrew Abrams, Avian Securities

Thank you.

Operator

Your next question comes from the line of Joe Lock(?) with Pantera Capital. Please proceed.

Q - Joe Lock(?), Pantera Capital

I just have two quick questions. First is with respect to some of the inventory increase that we have seen, can you give any kind of a breakdown in between the split on that between the PC side and TV side? And secondly just sort of looking out at the second half, I'm just wondering is there any change on the outlook that you guys for the strong pickup in TV demand and reasonably stable pricing, given that there has been a little more inventory coming into the first half than I think we anticipated a month or two ago? And capex capacity for the whole industry remains pretty robust in 60 and above coming into the second half here?

A - Hui Hsiung

OK. This is Hui Hsiung. I will try to answer your question. Actually I think that Max mentioned at our Q1 conference that earlier we have like 28 days of total inventory. That covers let's say raw material, as well as finished goods and finished goods was actually quite low. It was around one week or so. Actually for one week, inventory week, where we are forced to do some air shipment because pretty much all of this (raw was there effectively?) In other words, it's almost immediately we have to ship out to the customer. So that forced us to… The inventory wasn't enough. The kind of active inventory wasn't enough so that we have to airship some of the glass to China for the module assembly. So that cost additional operation expenses. So Max mentioned that during that conference that we tend to increase the 28 day sales to 35 days. So that we have working processes at a much more reasonable levels so that we have some leeway in terms of shipment by sea from Taiwan to China that reduced our operation. Also in terms of the ship to customers, we also have a little bit of a buffer, maybe two, three days more profit so that we can avoid the missed deliveries. So this increase is by and large for operational purpose rather than the excess inventory. I think the only kind of inventory we make is we anticipate during the Q2 some of the pallets are fully loaded and we have some additional customers that we cannot fulfill. We make a little bit of back time on inventory in the glass from… But otherwise this inventory increases almost as if by design.

Q - Joe Lock(?), Pantera Capital

OK. Thank you.

Operator

Your next question comes from the line of Ivan Goh with Dresdner.

Q - Ivan Goh, Dresdner Kleinwort

Hi, good evening. A number of questions. First of all, can you tell us what percentage of your 6G capacity today is being utilized to make TV panels?

A - David Su

This is David. For the current run rate, it is around 80%.

Q - Ivan Goh, Dresdner Kleinwort

OK. Secondly, I think you kind of implied earlier that the 32 inch and larger portion of your TV shipments is pretty much constant from Q1 to Q2. I just want to find out if I got this right or do you think that the 32 and larger size percentage is going to rise from the 50% that you achieved in the first quarter?

A - David Su

Yes, like I just mentioned before, for our 32 inch above, Q1 and Q2, the product mix, the ratio is quite similar.

Q - Ivan Goh, Dresdner Kleinwort

OK. And I have one last question. I think earlier there was a question regarding why you are not making a decision to invest in G8 right this moment and I think your answer was that it's also a technological question and also an economic question. I want to find out over the next few quarters, I just want to get a handle on this in terms of if you look at the economic benefits and the economic disadvantages of going to G8C, when do you think you might come to a point somewhere down the line where the economic benefits of G8 will be obvious and what does it take for that to happen?

A - Hui Hsiung

OK. This is Hui Hsiung. I didn't quite catch your question, but I believe what you are trying to say is in the past, for example, before Gen 5, every new generation means cost down, the fixed cost down because the fab has become more and more efficient, but after Gen 6, that gains into the like it's a different Gen. After Gen 6, it is more a new generation, actually means still larger and larger panels. So it is a different kind of ballgame. Your question is whether it is possible one time in the future maybe a newer generation again means high-efficiency or larger panels. So I think that in terms of larger and larger, up to I would say Gen 8, OK, from Gen 5 to Gen 8, pretty much we have a larger and larger glass size and it happens each generation. The most economic cut is eight feet or six feet. It is almost always like this. For example, Gen (6 is eight color, 32 inch and six color at 37 inch and Gen 7.5 is eight color of 42 inch and six color 47 inch?). So this is purely not in terms of additional panels, but just the panels, the same number, but the volume larger. Without fundamental technology advances, I would say we cannot achieve the same kind of cost reduction like before Gen 5. Theoretically, Gen 8, we are trying to do some of the new technology, but I think that is not a major kind. The costs are still incremental I would say. So I don't know the answer to that. I think these from what we can see now, the cost down, a lot of cost down for the TV panels actually comes from the material. It is not just the bargaining, but really the design of the product itself. So we use a lower-cost design so that we save the cost in the material. Our material in some of the models is like 80% of the total cost. So that is the direction now that we are following rather than on the fixed cost side.

Q - Ivan Goh, Dresdner Kleinwort

Thank you very much. That's helpful.

Operator

There are no further questions at this time.

Julie Chan

Well, thank you very much. Thank you for listening to AUO's Q1 2006 earnings conference call and if there is anything we can help, please send us e-mail to ir@auo.com. Thank you for your support.

Operator

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

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Source: AU Optronics Q1 2006 Earnings Conference Call Transcript (AUO)
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