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AU Optronics Corp. (NYSE:AUO)

Q4 2012 Earnings Conference Call

February 6, 2013, 09:00 AM ET

Executives

Andy Yang - CFO

Michael Tsai - General Manager, Video Solutions Business Group

Michael Sun - Senior AVP, Mobile Solutions Business Group

Pearl Lin - Senior IR Manager

Analysts

Brian John White - Topeka Capital Markets Inc., Research Division

Peter Liao - Nomura Group

Sharon Shih - Morgan Stanley

Jamie Yeh - Barclays Capital, Research Division

Samson Hung - UBS Securities

Operator

Welcome to AU Optronics Corporation Fourth Quarter 2012 Results Conference Call. The conference call will be recorded and webcasted at the request of AU Optronics. Any objections, please hang up now. A copy of the presentation for AU Optronics Corporation fourth quarter 2012 results announcement can be found and downloaded from its website, auo.com, under Investors.

The presentation is followed by the Q&A session. During the presentation, participant’s lines are put on mute. A recording replay will be available for this conference in three hours after the conference end time. It is made available for seven days until the end of 13th February.

The call will now be handed up over to Ms. Pearl Lin, Senior IR Manager. Please go ahead.

Pearl Lin

Good morning and good evening. My name is Pearl Lin, the IR Officer of AU Optronics. On behalf of AU Optronics, I’d like to welcome everyone to join our year 2012 fourth quarter results conference call.

Joining me here, we have AUO’s CFO, Mr. Andy Yang; VP and General Manager of Video Solutions Business Group, Mr. Michael Tsai; and Senior AVP of Mobile Solutions Business Group, Mr. Michael Sun. So today we have two Michael here. The conference call will take around 1 hour. Before we go into the Q&A session, please allow me to recap some of the key points of our Q4 2012 results, and provide you with our expectation of the first quarter 2013.

As always, before we begin AUO’s results conference call, I’d like to remind you that AUO’s financial results have been prepared on a consolidated basis in accordance with the ROC Taiwan GAAP. Please also take a minute to read the disclaimers in the Slide number 2 of our presentation material.

Now please move to Slide number 3, quarterly income statement. Our larger-size panel shipments drop by6.7% QoQ to 31 million units, while small and medium size panel shipments came down 10.8% to 37.6 million units. As a result, our Q4 revenue was reduced by 3.3% QoQ to NT$99.4 billion. On the operating level our gross margin has turned positive to 2.8%, while operating margin also improved by 4.1% to a negative 4.8%. And our EBITDA margin also improved by 3.4% and reached a positive 12.7% in Q4.

As for the non-operating side, the Company has recognized NT$8.3 billion in the non-operating expenses, which includes two major items. First asset impairment losses. The Company did some asset impairment tax at the end of the year in accordance with the Accounting Principles and so recognized around NT$4.3 billion of assets impairment losses this quarter. However these asset impairment losses were non-cash losses and therefore will not create any impact to the Company’s operating cash flow.

Second, antitrust-related cases: The Company proactively resolved certain antitrust-related civil cases this quarter, and so recognized a total of around NT$3.3 billion for anti-trust related expenses and losses. With the recognition of these non-operating losses, it is hoped that these efforts could help to mitigate the possible impact and uncertainties of the relevant matters on the Company’s future earnings.

So net-net a loss before tax reached NT$13.1 billion, around net loss was NT$13.2 billion. In this page we also include the revenue and margin performance for our display segment. Till the improvement of the loading rates, product mix and production efficiency in the fourth quarter, our operating margin for the display segment improved to a negative 3.2%, and our EBITDA margins for the display segment improved to a positive 13.5%.

Slide number 4, this page show on our income statement for full-year 2011, and year 2012. Overall, we reported NT$37.9 billion of operating losses than NT$55.9 billion of net loss for full-year 2012.

Slide number 5, balance sheet. As of end Q4, 2012, AUO's cash and cash equivalent remained stable at NT$77.4 billion, while total debt also reduced to around NT$223 billion. The Company also managed our inventory proactively and reduced our inventory dollar amount by 10% to NT$42.6 billion, and so our inventory turnover days reduced to 42 days. In addition, our net debt-to-equity ratio also came down slightly at 89.3% this quarter.

Slide number 6, cash flow highlights. With better working capital management, our Q4 cash flow from operating activities came in at NT$23.4 billion cash inflow. Net cash from investing activities, which mainly CapEx was NT$7.1 billion cash outflow. Cash flow from financing activities in Q4 was NT$16.6 billion cash outflow, mainly due to the debt repayment. As a result, net change in cash in Q4 was cash outflow of NT$173 million.

Slide number 7, revenue breakdown by product application. In Q4, TV panels represented 50% of our total revenue; followed by Notebook panels at 19%; Monitor panels at 14%; Consumer Products at 13%; and the remaining 5% of the revenue is supported by other business. Compared to last quarter, TV panels as a percentage of our revenue went up 4%, while Notebook percentage remained flat. Monitor panels down 1%, and Consumer Products down 1%.

Slide number 8, sales breakdown by size. Each time we add a new slide to show the size breakdown inch for AUO. The 40-inch and above panel accounted for 29% of all Q4 revenue, and this percentage has increased by 11% compared to the same period last year.

On the other hand, the 20-inch and above and less than 40-inch panels accounted for 32% of our total revenue and the 10-inch above and less than 20-inch panels accounted for 28%. And then lastly 10-inch panels accounted for 12% of our total revenue in Q4. From this slide you can observe that our 20 – our 40-inch and above segment continue to grow in terms of the revenue.

Next slide; Slide number 9. For our total product area, Q4 shipment per square meter increased 3.6% to 5.5 million square meters. And ASP per square meter came down 3.4% QoQ to US$596, mainly due to product mix changes.

Next slide, small and medium products. Our Q4 small and medium shipment in area increased by 2.6% to 163,000 square meters, and our small and medium revenue came down around 3% to NT$11.2 billion.

Slide number 11, AUO's capacity by Fab. We planned not to ramp any new capacity in Q1, but only focus our capacity upgrade for new technologies and products and, so our total capacity in area remain similar compared to last quarter.

Now, I’d like to share with you the Company's expectation of our Q1 outlook. Based on our current business outlook, the Company forecasts its larger-size panel shipment to be down high single-digit percentage QoQ, while low and medium panel shipment to be down about 20 percentage QoQ. On a product mix-adjusted basis, blended ASP for larger size is expected to be flat to up slightly QoQ. And the blended ASP for small and medium panel are expected to up by double-digit percentage QoQ, which is supported by the ramp up of the tablet shipment. On the other hand, we expect our overall loading rate Q1 to be lower compared to that of Q4.

Above is our Q1 outlook. Please note that the above is our best forecast based on our current business outlook. But it may be changed, subject to actual market supply/demand and economic condition.

Looking forward to 2013, the new technologies that the Company has cultivated for a long time are getting ready. In particular, the operations for high-end product in small and midsized are expected to return to the track.

With more top tier clients added to the customer bases of small and midsized business, it is hoped that the Company has the chance to gain more market shares. In addition, with the trend that display industry is moving to the device with higher resolution and large screens, the industry supply and demand is expected to become healthier. AUO will continue to focus on our core competence and strengthen our portfolio of the high-end products aiming to maximize the capacity value and enhance the Company’s operating performance.

And now operator, please open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian White of Topeka. Please ask your question.

Brian John White - Topeka Capital Markets Inc., Research Division

Yes. When we look at the tablet market, do we expect your tablet sales to fall sequentially in the March quarter?

Andy Yang

You mean that tablet revenue in first quarter to be lower than fourth quarter?

Brian John White - Topeka Capital Markets Inc., Research Division

Yes.

Andy Yang

No, I don’t think so.

Michael Tsai

No actually its kind of the sequentially grow. Actually we see where tablet growth momentum is strong. We grab the global Top Five performers already and we’re actually looking for double-digit growth in this year.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And what should – how should we expect the growth in the March quarter? Is that 10% or 20% quarter-on-quarter?

Pearl Lin

Hi, Brian. Maybe it’s difficult to provide a growth rate for a specific product. But just as Michael mentioned, as you know we got some further engagement from the worldwide top tier clients and previously we focus only enjoy systems last year. So we have a low base last year. So this year we do expect a strong growth momentum for tablet for the full-year.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And when we think about the Chinese New Year, how was the sell in for Chinese New Year? I know we won’t get the sell out for a couple of weeks, but how did you feel about the sell in for Chinese New Year?

Andy Yang

We expect the Chinese New Year TV sales, in China its about 20% year-to-year gross, this year compared with last year.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And finally the utilization you said will go down in the first quarter. What was the utilization in the fourth quarter?

Andy Yang

It was close to 90% in fourth quarter.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And then where are we going in the first quarter?

Andy Yang

I guess it would be somewhere around mid 80s.

Brian John White - Topeka Capital Markets Inc., Research Division

Mid 80s, great. Thank you.

Andy Yang

You’re welcome.

Operator

Your next question comes from the line of Peter Liao of Nomura. Please ask your question.

Peter Liao - Nomura Group

Hi, (indiscernible) management and thank you for taking my questions. My first question is about CapEx plan. You mentioned you will lower your CapEx this year to NT$20 billion versus NT$40 billion last year. And may I know what the NT$20 billion for – it’s mainly for maintenance or what kind of a technology upgrade would be useful and can we have a rough breakdown?

Andy Yang

Sorry, we don’t have the breakdown information handy, but yes some of them would be maintenance CapEx, but the majority of the CapEx will go to the technology improvement and capacity conversion such as the AHVA especially for tablet and also smartphone, and as well as the 4K capacity conversion for TV. So, I guess, these are the major items for our CapEx this year.

Peter Liao - Nomura Group

Okay, thank you. And my second question would be, can you help – can you just give us a quick update and (indiscernible) on the status and you know for both large small size and touch panels? Thank you.

Andy Yang

For the smartphone actually there are – we’re lending up our capacity to improve our yield and but as you know first quarter is typically a low season for smartphone. So I think we may need more time to get it ready and also to get the co-design with our customers waiting for production later this year. And for TV, I think at this time I think it is still – we still – a big (indiscernible) are these dates and although we do have some co-developed products with the global brand names as you know, as we’ve promoted in the CES Show already. But I think within this year the – we’re still under the evaluation about what would be the good timing for mass production.

Peter Liao - Nomura Group

Okay, thank you. May I have one more question?

Andy Yang

Sure.

Peter Liao - Nomura Group

Okay, thanks. My final question is regarding the loading rates. Actually you just mentioned last – fourth quarter last year the loading rates were like 90% and this quarter would be like 85% something, right? Okay and my question would be your guidance for the large panel will decline by a high single-digit, but how can your loading rate just drop by 5%, [Andy]?

Andy Yang

Actually the shipment guidance and loading rate guidance there might be a difference by the inventory level. So, it's not necessary to be in line with each other all the time.

Peter Liao - Nomura Group

So, may I say it’s likely to see inventory at a euro for the preparation for obviously going in the second quarter?

Andy Yang

Well, it really depends because for now it's still early February, and as we are online in our afternoon session that if our view about March shipment to be strong enough then I think we may need to adjust higher the loading rate at a time, but still the decision has yet to be made.

Peter Liao - Nomura Group

Okay, I see. Thank you, and great to see you improving gross margin trend. Thank you.

Andy Yang

You're welcome.

Operator

(Operator Instructions) Your next question comes from the line of Sharon Shih of Morgan Stanley. Please ask your question.

Sharon Shih - Morgan Stanley

Hi. This is Sharon. Let me have two questions, follow-up from today’s NS meeting. My first question is that for this year our target for the TV market will be more on the high resolution as well as the large size TV. Could you help us to understand a bit more regarding this high resolution TV, I believe we are taking about 4K TV. But our expectation for the overall 4K TV contribution to our shipment this year and what’s your view regarding the overall, the price point – the good sweet spot for the large size 4K TV? This is my first question.

Michael Tsai

This is Michael. For TV we’re talking about our 4K, 2K. So it become very hot topic this year, especially after the CES. So as we mentioned in – this afternoon our conference. So we expect this year we can have the 20% share in our 55-inch in the – both 55-inch and the 65-inch total shipment shares 20%, yeah.

Sharon Shih - Morgan Stanley

And may I know what’s our expectation for roughly for the large TV proportion for our total TV shipment this year? I think that we have show that 40% above already accounted, 29% for our total shipment in Q4, should we expect least numbers will be able to increase to more than 30% for the full-year average this year?

Michael Tsai

Yeah. We already achieved 29% over 40-inch. We expect to reach around a 29%, last year – 29% last year, 40-inch – above 40-inch. And we expect we can over 50%, 40-inch, right.

Sharon Shih - Morgan Stanley

50%, 50?

Pearl Lin

50% for shipment.

Michael Tsai

For shipment.

Sharon Shih - Morgan Stanley

Okay, this year.

Pearl Lin

Maybe that clarify. For Q4 40-inch and above have accounted for around 40% of our total Q4 TV shipments. And this year we expect this percentage to increase to around maybe 50% or even higher.

Sharon Shih - Morgan Stanley

So you mean the Q4 is more than 40% of the TV shipment?

Pearl Lin

Yes. And this year we expect 50% and above.

Sharon Shih - Morgan Stanley

Okay. I got you. Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jamie Yeh of Barclays. Please ask your question.

Jamie Yeh - Barclays Capital, Research Division

Hi. Good evening, everyone. I also have two follow-up questions, following afternoon session. The first one is that we all know this year panel supply-demand will be quite balanced because of the limit capacity expansion. And I’d like to know well how, what kind of difference between different kind of application? For example, like smartphone and TV or IT panels, how does that demand-supply dynamics are different?

Pearl Lin

Hi, Jamie. This is Pearl. Of course TV is still accounted for the largest share in terms of the total demand. And next year we expect unit growth, TV unit growth to go maybe around low single-digit percentage combined with the 1.5-inch of the size migration. So we expect the total TV area growth has a chance to grow more than 10% in 2013. And terms of the monitor, a panel monitor is a material product, so we picked the shipment to tend off slightly. And for a notebook the (indiscernible) we also expect that the shipment to come down maybe mid single-digit, but in terms of a tablet of course we still expect very strong tablet growth and maybe has a chance to achieve more than 40% of the unit growth this year. So, combine all of these products and combine all of the size migration, evidently we expect the demand area has a chance to grow maybe along 10% or even higher. This is our current expectation and assumption.

Jamie Yeh - Barclays Capital, Research Division

Okay, thank you. So, we don’t expect (indiscernible) like for a specific application will have very huge panel price hike in the future, but for some of other application for similar IT base is still idle and panel prices may just continue to decline. You don’t think this will happen for 2013?

Michael Tsai

Jamie, it's too difficult to comment on the outlook especially and it's quite dynamic in a supply-demand situation like now as you may know for the Company we’re converting some of our capacity between the so called commodity, especially panels. So, I think the – our peers may still – they also do the same thing. So, the supply situation could be very – could fluctuate from time-to-time. So, it's very difficult to comment on your question, sorry.

Jamie Yeh - Barclays Capital, Research Division

Sure, that’s okay, I understand. And the other question that I have is, to follow-up on the 4K, 2K questions, so far the price is two times of 4-HD in terms of TV set and likely also panel cost. And can Michael or other management comment on how does that, I mean, in terms of yield rate – the current yield rate and what kind of room that we can improve and by that time what kind of price that consumer can expect and then by that time in theory if yield rate is not an issue then what kind of additional cost that you see additionally from 4-HD and what kind of gross margin that we can expect to compare with 4-HD assuming consumers are willing to pay premiums to buy 4K, 2K TV?

Pearl Lin

Hi, Jamie. As you know it's difficult to comment on the yield rate for a specific product. But as you know actually it was the first one in the world to mass produce our 55 4K product back to the end of the 2011. So, compared to our peers we actually have more than one year of the mass production experience. So, I think that we should not be, have any problem and we will gradually improve over time. And so, that’s why Michael – as Michael mentioned this year we did expect the quite strong growth from the 4K for 55-inch and above product, but sorry for the margin and other information maybe it's difficult to provide for a single product.

Michael Tsai

Although cannot provide any numbers, but I'll like to aid and also emphasize that AUO has been doing 4K for longer than one-year. And also we think our technology label should be able to meet the customer requirement above the high end, high resolution TV model from the global brands. So, from this point of view, I think AUO should be one of the leaders in the 4K TV and the yield the things we have been doing this for longer than one year. I think that our yield improvement should be very – should be good enough to contribute to our sales revenue and profitability within this year.

Jamie Yeh - Barclays Capital, Research Division

Sure. And just one more question on the 4K, 2K. I understand yield rate probably not easy to talk about that at this moment, but in terms of material cost that Michael mentioned is like (indiscernible) were stronger, but light source are needed for the 4K, 2K panels and overall if we just discuss the material cost, what’s additional cost like 30% or 40% is that you need for 4K, 2K, compared with 4-HD?

Pearl Lin

I think as Michael mentioned, this afternoon, because of the pixel is getting smaller and smaller, so may be we need more design and work on the backlight. But I think for 4K, right now we have different sizes and we also have different frame way of the product so and so. So maybe we don’t have the one – only one answer for the cost additions for the 4K product. Therefore the market price, I think right now on average the 4K panel price is around 1.9 to 2 times of the 4-HD panels. This so far we can provide right now.

Jamie Yeh - Barclays Capital, Research Division

Okay. Sure. Thank you.

Operator

Your next question comes from the line of Brian White of Topeka. Please ask your question.

Brian John White - Topeka Capital Markets Inc., Research Division

Yes, just on the one-time items we do not expect any one-time items in the first quarter, correct?

Andy Yang

I said in payment loss, typically the Company work through the impairment tax at the end of each year, unless there is, very significant change to the price of our product. So typically the asset impairment tax would be down once per year and for the anti-trust Brian as we explain in the afternoon, it’s a very complicated and sensitive issue. And as while we already stated in our news letter, we – in fourth quarter last year we have been practically resolved some of the major civil cases with some of our major clients. So, it is hoped that the – these kind of the recognitions in fourth quarter of this anti-trust provisions could help to mitigate the impact on the P&L in the future.

Brian John White - Topeka Capital Markets Inc., Research Division

So it looks like just the numbers you gave us, if you did not have one-time items, you would have been profitable on an operating income basis in the quarter, correct?

Andy Yang

You mean fourth quarter last year?

Brian John White - Topeka Capital Markets Inc., Research Division

Yes.

Andy Yang

No. I think these one-off items are all classify in the non-operating expenses. So if …

Brian John White - Topeka Capital Markets Inc., Research Division

In the non-operating, okay.

Andy Yang

… we look back to our operating margin, it was 3.2% net which is still high cost to breakeven though.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. I got it. And it is – do you think there is a path to profitability in 2013? You think we can have a quarter that’s profitable?

Andy Yang

Normally we don’t have – we don’t – it’s not easy for us to comment on the quarterly performance on an overlooking basis. But I think that very important for us if our small and medium business to improve as much as we expect, I think yes, it’s very likely that the Company could turn profitable somewhere in the future.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And finally cost down, what was the cost down in the fourth quarter and what is the cost down expectation for the first quarter?

Andy Yang

Okay. For cost down, typically we only comment on the component side and fourth quarter the component cost down was 2.1% and this quarter I think it will be quite similar.

Brian John White - Topeka Capital Markets Inc., Research Division

Great. Thank you.

Andy Yang

You’re welcome.

Operator

(Operator Instructions) We have one more question on the line of Samson Hung of UBS. Please ask your question.

Samson Hung - UBS Securities

Hi, good evening everyone. I just have a very quick question regarding your capacity. I think you mentioned that you will not add any capacity for this year, but in the mean time when you do this capacity conversion like for this 4K, 2K and when you do the adjustment for this HVA would you expect any like capacity, actually a reduction or the actual output will be reduced during the year? Thank you.

Andy Yang

Okay. Normally for this kind of capacity conversion it was half the capacity output goes to some extent. But I think at given we have beginning experience in 4K and also HVA. I think we’re also spending efforts to be bottleneck our capacity performance. So, hopefully this kind of loss caused by the capacity conversion could be compensated by the gain that we created from the bottleneck.

Samson Hung - UBS Securities

I see. So, if there is any like a possibility for a potential like HD, that could be reduced or would you expect in any like what quarters could be has the highest possibility?

Pearl Lin

Samson, I think just to put it simply – put it simple just, as Andy mentioned when we were doing a lot of the conversion maybe we have some capacity loss. So, we will try our best to do that in bottleneck. So, I guess, this year you can just assume our capacity will be quite similar compared to last year; maybe it's easier for you. Thanks.

Samson Hung - UBS Securities

Okay, I see. Thank you very much.

Andy Yang

You’re welcome.

Operator

Thank you. There are no further questions. I’ll now hand the call back to management for closing remarks.

Pearl Lin

If there are no more questions, we’re going to end the conference call. For those who still have questions, please do write to us to ir@auo.com. Operator, please close the conference call session. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.

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