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Executives

Pearl Lin - Investor Relations

Michael Tsai - Senior Vice President and General Manager of Video Solutions Business Group

Andy Yang - Chief Financial Officer

Analysts

Brian White - Cantor Fitzgerald & Co.

Andrew Abrams - JG Capital

Sharon Shih - Morgan Stanley

AU Optronics Corp. (AUO) Q4 2013 Results Earnings Call January 27, 2014 1:00 AM ET

Operator

Welcome to AU Optronics Corporation Fourth Quarter 2013 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’s fourth quarter 2013 results announcement can be found and downloaded from its website, auo.com, under Investors.

At this time all participants are in a listen-only mode. There will be a question-and-answer session following the presentation (Operator Instructions). The conference call today is recorded and will be available for replay. Detailed information will be indicated on the website, auo.com.

I would now like to hand the call over to Ms. Pearl Lin, Senior IR Manager.

Pearl Lin

Good morning and good evening. My name is Pearl Lin, the IR Officer of AU Optronics. On behalf of AU Optronics I would like to welcome everyone to join our 2013 Fourth Quarter Results Conference Call.

Joining me here we have AUO's CFO, Mr. Andy Yang; EVP and General Manager of Mobile Solutions business Group, Mr. F.C. Hsiang; and Senior VP and General Manager of Video Solutions Business Group, Michael Tsai. This 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 the Q4 results, and provide you with expectation of the Q1 outlook this year. In addition before we begin AUO’s result conference call I would like to remind you that starting from 2013 Taiwanese companies need to report financial results on a consolidated basis in accordance with Taiwan IFRS.

Please note that we have historically presented our consolidated financial statements in accordance with ROC GAAP, including our consolidated financial statements for the year-ended December 31, 2012. Consequently, the selected comparison financial information to be included in our quarterly earnings release in 2013 may differ from those released historically. For details please take a minute to read the disclaimer in slide number two of our presentation material. We also provide selected items of the statement of comprehensive income on Taiwan IFRS since Q1, 2012, in our appendix for your reference.

Now please move to slide number three, statements of comprehensive income. In Q4, our larger size panel shipments increased by 2.8% Q-on-Q to 30.2 million units. Owing to slow seasonality, our small and medium panel shipments declined by 6.6% to 41.2 million units. In addition our Q4 revenue came down 4.1% Q-o-Q, to NT$102,703 million. Despite both the decline of market prices for TV panels our gross margin for Q4 still achieved 7.5% thanks to the company’s expected cost control and improved operating efficiencies.

Meanwhile AUO’s operating margin and EBITDA margin reached 1% and 16% respectively. In addition our net profit reached NT$1.1 billion representing a base EPS of NT$0.1.

As of our display segment information our operating margin and EBITDA margin for display segment reached 1.9% and 16.6% respectively.

Slide number four, statement of comprehensive income for full year. For full year 2013 AUO recognized revenue of NT$416 [million], up 10% YOY despite a flattish capacity growth. Full year OP margin achieved 2% while EBITDA margin reached 17.3%. In addition the company generated full year net profit of NT$4.3 billion which improved significantly compared to one year ago.

Slide number five, balance sheet as of end Q4, AUO’s cash and cash equivalent was NT$76 billion while total debt reduced to NT$185 billion, with a net profit and further debt repayment in Q4. Our net debt-to-equity ratio improved to 61% at the end of this quarter which improved considerably from one year ago. In addition, thanks to the prudent inventory management despite during the slow quarter the company’s inventory amount still reduced by 9.4% while the days of inventory further fell to 38 days, which is the lowest for the past four years.

Slide number six, cash flow highlights. Our Q4 cash flow from operating activities came in at NT$19.4 billion cash inflow. Our CapEx in Q4 was NT$5.4 billion and net cash from investing activities was NT$4.3 billion cash outflow. Cash flow for financing activities in Q4 was NT$9 billion cash outflow, mainly due to the debt repayments. As a result, AUO’s net change in cash in Q4 was cash inflow of NT$6.3 billion.

Slide number seven, revenue breakdown by product application. In Q4, TV panel represents 44% of our revenue followed by mobile PC panel of 17%. Consumer product at 16%, monitor panels at 15% and the remaining 8% of the revenue is supported by other business.

Slide number eight, sales breakdown by size. For the size breakdown, our 39 inch and above panel accounted for 39% of our Q4 revenue. The 20 inch above and less than 39 inch panel accounted for 16% of our revenue. The 10 inch and above to 20 inch panel accounted for 28% and less than 10 inch panels accounted for 17% of our total revenue in Q4.

Next slide gross area. For our total gross area Q4 shipments per square meter hit record high and reached 5.9 million square meters. Our ASP per square meter came down by 9% Q-o-Q to US$551 mainly due to the weak TV panel prices and other mix changes.

Next slide small and medium products. Again due to the seasonality our Q4 small and medium shipments in area came down 1.7% to 266,000 square meters. In addition our small and medium revenue came down 6.8% to NT$16.1 billion.

Slide number 11 AUO’s capacity by size. We plan not to rent any new capacity in Q1. So our total capacity in area maintain similar compared to Q4 last year.

Now I would like to share with you the company’s expectation of our Q1 outlook. Based on our current business outlook our larger sized panel shipment is expected to be down high single digits to low teens percentage Q-o-Q. Our other mix adjusted basis, our larger sized blended ASP is expected to flat or down slightly Q-o-Q. For small and medium products our shipment is expected to be down 10% to 20% Q-o-Q due to seasonality. Please note that the above is our current best forecast based on our current business outlook but it may be subject to change due to the actual market supply/demand and economic conditions.

Looking forward to 2014, displays will continue to follow the trend of better resolution and bigger screens. AUO has successfully launched the world’s first UHD 4K Curved LCD TV display and pioneered in mass production of the 6-inch WQHD ultra high resolution LCD panel for smartphones at the end of last year. The company will continuously focus on the technological upgrade and product differentiation, will also proactively develop the sectors with high growth potential as well as high entry barriers such as car displays, hoping to discover growth momentum and secure technological lead within the highly competitive TFT LCD industry with an aim to further enhance its operating performance.

This ends our presentation. We shall use the remaining time to take your questions. Before we open the floor for questions, I would like to remind you to limit your questions to three per call so that we can give equal opportunity to all participants. Thank you.

And now, operator, please open the floor for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Brian White from. Please go ahead.

Brian White - Cantor Fitzgerald & Co.

Yeah, hi good evening. I'm wondering if you could talk a little bit about what your views are for the Chinese New Year, what type of growth or lack of growth do you expect in the TV market during the Chinese New Year?

Michael Tsai

This is Michael. For Chinese Lunar New Year we expect pick-up of the TV trend promotion. So we expect sales quantities about 3.04 million, so compared with last year, [inaudible] minus 2%.

Brian White - Cantor Fitzgerald & Co.

Okay. And could you talk a little bit about the price decline in the fourth quarter, down 9%. What does that come from, that seems a little steep?

Pearl Lin

Brian, I think as I mentioned the price decline is mainly due to two reasons. First is the market price decline. As you know the price fell more starting from September and October. So for the Q-o-Q the price still declined quite a bit. And second is due to our product mix changes. So I think combined the overall price in area declined by around 9%.

Brian White - Cantor Fitzgerald & Co.

Okay. And when we think about the capacity utilization rate where were we in the fourth quarter and where do you expect to be in the first quarter?

Andy Yang

Hi this is Andy. I’ll try to answer your question. I think fourth quarter last year the loading rate was quite similar to third quarter which was around 90% and first quarter as we guide already we would like to keep that flexibility and adjust the loading rate according to market condition as well as our inventory levels.

Brian White - Cantor Fitzgerald & Co.

So it will come similar in the mid-80s, is that reasonable?

Andy Yang

Well I think we still need to look after the price situation here and also inventory. Although for us our inventory is quite healthy but industry wide we need to watch out very closely.

Brian White - Cantor Fitzgerald & Co.

Okay. Thank you.

Andy Yang

You're welcome.

Pearl Lin

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Abrams from JG Capital. Please go ahead.

Andrew Abrams - JG Capital

Hi. Thanks for taking my questions. First can you give us an idea of what the percentage of your TV panel shipments were ultra high-def and what kind of premium they carry relative to, I guess standardized units or standard units?

Pearl Lin

Andrew, it’s Pearl. So you mean the price premium for the UHD compared to the full HD panel?

Andrew Abrams - JG Capital

Well. No. Compared to let's take a 55-inch standard LCD panel versus what you are able to get for your premium that you would get for your UHD or 4K for the same size panel?

Pearl Lin

Andrew I think in terms of the UHD as you know right now the -- we focus on different product. We have really high end supporting the develop market we have higher frame rate maybe 120 Hz and so the price premium maybe will be different compared to the entry level product for example like 60 Hz. So but overall I think this year the forecast has a chance to reach better volumes. So the company is also very aggressive and trying to drive down the overall cost structure and trying to push the volumes.

So I think overall this year our target for the price premium over the current full HD product maybe at 1.3 times, now this will be our target this year.

Andrew Abrams - JG Capital

And that's for 2014 you are talking about?

Pearl Lin

Yes.

Andrew Abrams - JG Capital

Okay. And can you give us an idea of what the percentage of 4K UHD was of your total TV shipments?

Andy Yang

So we expect in 2014 our target is 15% of AUO's TV total shipments.

Andrew Abrams - JG Capital

`

Will be 4K UHD, okay.

Andy Yang

Yes.

Andrew Abrams - JG Capital

And can you give us an idea of what the ASP was on small panels for fourth quarter and what you are expecting for first quarter?

Pearl Lin

For Q4 last year I think overall the ASP is quite similar compared to Q3 last year. And so as you know the product mix is really very complicated. You have audio-video products and some smartphones and some tablets. So sometimes it’s really difficult to give the guidance about that.

Andy Yang

You mean because of the mix on small panels?

Pearl Lin

Yes. It’s very complicated.

Andrew Abrams - JG Capital

Okay. And just so I can confirm this, what would have been the net non-operating income number without the sale of shares for fourth quarter, if you could just kind of give that number?

Andy Yang

Actually there are several miscellaneous incomes that consist of our non-operating revenue. Beside the gain on disposal of long-term investments there are gains from the ForEx transactions as-well-as some tax subsidy from some foreign subsidiaries. So there are three, there are several items and if we try to summarize all this together it would be around NT$ 1 billion if we include all the things together.

Andrew Abrams - JG Capital

Okay, great. Thank you very much. I appreciate it.

Pearl Lin

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Sharon Shih of Morgan Stanley. Please go ahead.

Sharon Shih – Morgan Stanley

Hi, this is Sharon. I just want to have two follow-up questions from the call earlier. The first question is that I think today at the call we talked a bit more, we mentioned a bit more about this car display. Definitely it’s because of the more showcase at the 2014 CES. So if possible could you just tell us a bit of it more about the potential upside opportunity in car display? Is that a more integrated solution or is that because we are seeing more replacement for hardware solution? And the second question is probably for Andy. Could you help us to understand a bit more about this year’s CapEx? What is the key purpose for the CapEx this year? I recall this year the CapEx is above the NT$30 billion this year. That will be my two questions. Thank you.

Andy Yang

Okay, let me try to answer you first before I transfer to FC. For the CapEx if we could, if we could get all the conditions satisfied for us to kick off our Kueishan Gen 6 LTPS, which include market supply demonstration as well as the success of our local funding in China, if these conditions can be satisfied that would help us to kick off the Kueishan fab within this year. And if that is the case our total CapEx for year 2014 will be around NT$30 billion. If we try to divide into which one has for the new capacity, which one is for the technology upgrading I would say perhaps NT$8 billion to NT$10 billion is for Kueishan and the remaining is for the technology upgrading mostly in Taiwan.

Sharon Shih – Morgan Stanley

I see. So if excluding the investment in new Kueishan, basically the CapEx will be roughly the same to last year?

Andy Yang

Yeah.

Sharon Shih – Morgan Stanley

Okay.

Andy Yang

Yes.

Sharon Shih – Morgan Stanley

Okay.

Pearl Lin

Sharon regarding the car display as you know that there is a growing trend that the car line up are embedded more and more displays. So overall the car display still enjoys double digit growth for the industry. But what is special for the car is the reliability is really critical and so normally it will take maybe two to three years to get qualified by our clients and after you get qualified you can receive a long term contract.

So that’s why the before market entry barrier is really high. And so far AUO actually 90% of our car display focused before markets. So this actually demonstrates our capability in the car display and right now of course they are coupled with new trend. For example the wide-viewing angle or for example the car display embedded with the touch. And as you know AUO has a focused on the touch in other application for a while so we can support our total solution including the lamination.

So actually we have a quite good solution and it’s difficult to replicate by other competitors. So I think over this year we still expect high growth rate for our car display markets. Right now we expect our car display has a chance to grow maybe 30% Y-o-Y this year in terms of the units.

Sharon Shih – Morgan Stanley

Okay so that will be 30, right?

Pearl Lin

Yes 30.

Sharon Shih – Morgan Stanley

Units, okay I see. Thank you.

Pearl Lin

Thank you.

Operator

All right. Thank you. Next there is a follow-up question from the line of Brian White from Cantor Fitzgerald. Please go ahead.

Brian White - Cantor Fitzgerald & Co.

Yes. Just when we think about the TV market in the first quarter versus the PC market I am wondering which market is going to be stronger. They are both going to fall I assume but if there is one that's going to do a little bit better than the other in the first quarter?

Pearl Lin

Hi, Brian. I think TV and IT, the PC the trend actually is quite similar in Q4. But maybe within the PC, Notebook the trend is slightly better than the desktop panels. Yes, do that answer your question?

Brian White - Cantor Fitzgerald & Co.

Yes. And when we think about curved, curved TVs. Just so what are you doing in curved TVs? You are already involved in curved televisions, will we see more of it as the year progresses. Maybe just update us on the curved TV?

Michael Tsai

So I feel on the TES this year almost every international brand or the Chinese brands they all have the curved TV product showing in this year. So especially right now everybody is pushing the 4K. So we got a very good feedback from the customer especially for the 4K curved TV design. Most of the project is focused on the 4K curved TV. So we expect that curved TV can create some kind of a new TV segment in 2014 this year.

Brian White - Cantor Fitzgerald & Co.

And when do you think we will start to see these in the market in a bigger way. We don't see a lot today, right. We saw at TES but when will we start to see these in the stores in a bigger way this year, when this year?

Michael Tsai

I think that one of the big events for coming big sales season is the China Labor Day, Labor Saturday, May 1. So we suppose by the end of Q1 or beginning of Q2 those Chinese TV brands will have many curved TV being promoted in the market.

Brian White - Cantor Fitzgerald & Co.

Okay. And is this a -- do you get a better margin or a better -- you get a premium when you create a curved panel or the same price?

Andy Yang

Brian, let me try to answer that question. I guess the price inflation in TV panel still goes on as how the market predicts. So when AUO maybe at this moment is the only one who could promote curved TV that will help us to improve our blended ASP to some extent, and in the meantime to offset the pricing penetration to some extent.

So for first there should be some premium but so far this is just the beginning. And we hope that with this kind of high-end products to be promoted to market by AUO that would help us to sustain our blended ASP.

Brian White - Cantor Fitzgerald & Co.

Okay. Thank you.

Pearl Lin

Thank you.

Andy Yang

Welcome.

Operator

And our next is also a follow-up question from the line of Andrew Abrams from JG Capital. Please go ahead.

Andrew Abrams - JG Capital

If you theoretically let's say that everything goes your way as far as the China fab build, would you have an idea of what the start-up capacity would be and what total capacity would be for that tab. And kind of how long you think the construction will take to get everything up and running?

Andy Yang

Okay. In our earlier release we stated that for the phase I in our China fab the capacity might amount to 20K to 30K per month. And which may cause a total CapEx of NT$50 billion. And that NT$50 billion might be -- might need to be spent in three years, I mean from year 2014 to ‘16.

Andrew Abrams - JG Capital

Okay, but what would your -- I mean I am assuming you are not going to build out everything all at once, what do you think the start-up run rate would be and when do you think that would be?

Pearl Lin

Yes, hi, Andrew. Yes, so right now we finished the shell already. So if the funding is ready we may need to build [inaudible] for equipment and we may need additional six months to ramp up. So if we kick off this year smoothly then maybe we have the chance to mass production in 2016, maybe early 2016 if everything running smoothly.

Andrew Abrams - JG Capital

Great, thank you.

Pearl Lin

Thank you.

Operator

Thank you. (Operator Instructions). Thank you. It seems that there are no further questions. I will hand the call back to Ms. Pearl Lin.

Pearl Lin

Hi, if there are no more questions we are going to end the conference call. So thank you for your participation. For those who still have questions please do write to us to ir@auo.com and we also want to say Happy New Year, Happy Chinese New Year. Thank you. Operator, please close the conference call session.

Operator

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

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