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AU Optronics (NYSE:AUO)

Q1 2014 Earnings Call

April 30, 2014 8:00 am ET

Executives

Pearl Lin

Andy Yang - Chief Financial Officer

Michael Tsai

Fu-Chi Hsiang - Executive Vice President and General Manager of Mobile Solutions Business Group

Analysts

Andrew Abrams - JG Capital, LLC

Jamie Yeh - Barclays Capital, Research Division

Arthur Lai - Citigroup Inc, Research Division

Jerry Su - Crédit Suisse AG, Research Division

Andrew Abrams - Avian Securities, LLC, Research Division

Operator

Welcome to AU Optronics Corporation First Quarter 2014 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 first quarter results announcement can be found and downloaded from its website, auo.com, under Investors. [Operator Instructions]

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 AUO, I would like to welcome everyone to join our first quarter 2014 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; Senior VP and General Manager of Video Solutions Business Group, Mr. 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 Q1 results, and provide you with the expectation of the Q2 outlook. In addition, before we begin AUO's results conference call, I would like to remind you that AUO's financial results have been prepared on a consolidated basis in accordance with the Taiwan IFRS.

Please also take a minute to read a disclaimer in Slide #2 of our presentation material.

Now please move to Slide #3, statement of comprehensive income. In Q1, our larger size panel shipments declined by 3.3% Q-O-Q to 29.2 million units. And our small and medium panel shipments declined by 18.7% to 33.5 million units, owing to the traditional slow season, and the market price decline of TV panels for the first half of Q1. Our Q1 revenue came back 8.7% Q-O-Q to TWD 93.8 billion. Despite of the decline of TV panel prices, our gross margin for Q1 still achieved 7.3%, thanks to the company's cost and product mix improvement. In addition, our operating margin and EBITDA margin maintained at 0.7% and 16.8% respectively. Net-net the company continued to report a net profit of TWD 166 million.

The dollar display segment information, our operating margin for the display segment reached 1.6%, the EBITDA margin for display segment reached 17.8%.

Slide #4, balance sheet. As of end Q1, AUO's cash and cash equivalents was TWD 73 billion, while the total debt reduced to TWD 177 billion. With a net profit and further debt repayment in Q1, our net debt-to-equity ratio improved to 58% at the end of this quarter, which improved considerably compared to 95% one year ago. In addition, thanks to the prudent inventory control, despite during the slow quarter, the company's inventory amount remain quite flat, with the inventory days further stayed at the healthy level of 39 days.

Slide #5, cash flow highlights. Our Q1 cash flow from operating activity came in at TWD 10.4 billion cash inflow. Our CapEx in Q1 was around TWD 5.6 billion, and net cash from investing activity was TWD 5 billion cash outflow. Cash flow from financing activity in Q1 was TWD 8.4 billion cash outflow, mainly due to the debt repayment. As a result, AUO's net change in cash was cash outflow of TWD 3.2 billion.

Slide #6, revenue breakdown by product application. In Q1, TV panels represented 42% of our revenue, followed by mobile PC panels, which include tablets and notebook at 18%, consumer products at 17%, monitor panels at 15% and the remaining 8% of the revenue is supported by other business.

Slide #7, sales breakdown by size. For the size breakdown, our 50-inch and above panels accounted for 20% of our total Q1 revenue. The portion improved significantly compared to 13% in Q1 last year, which evident our achievement of strong size improvement. In addition, the 39-inch and above accounted for 17%, the 20-inch and above and less than 39 panels account for 17% of our revenue, and the 10-inch and above to 20-inch panels accounted for 29%, and less than 10-inch panel accounted for 17% of our display revenue in Q1.

Next slide, Slide #8, for the total cost shipments, our Q1 shipment per square meter declined 7.7% to 5.4 million square meters, and our ASP per square meter came down by 4.4% Q-O-Q to USD 527, percent [ph] mainly due to the weak TV panel prices for the first half of the Q1, and the changes of the product mix.

Slide #9, small and medium products. Again, due to the seasonality, our Q1 small and medium shipments in area, came down by 11.5% to 235,000 square meters. In addition, our small and medium revenue came down 11.6% to TWD 14.3 billion.

Slide #10, AUO's capacity by size. We plan not to rent any new capacity in Q2, so our total capacity in area remain quite flat compared to Q1. Now, I would like to share with you the company's expectation of our Q2 outlook. Based on our current business outlook, our larger sized panel shipment is expected to be flat or up slightly Q-o-Q. Our product mix adjusted basis, our larger size blended ASP is expected to be up mid to high single-digit percentage Q-o-Q. For small and medium products, our shipment is expected to go up by double-digit percentage Q-o-Q. Kindly note that, our guidance is in unit basis, not the area basis. Please also note that the above is our current best forecast based on the current business outlook, but it may be changed subject to the actual market supply and demand economic conditions.

Looking forward to the second quarter, industry supply and demand, they're hopefully great to return more favorable. The company will continue to drive technology innovation, and as it to a profit oriented product strategy, hoping to maximize the capacity value and to create solid long-term cash flow, as well as the sound financial structure.

This ends our presentation. We shall use the remaining time to take your questions.

[Operator Instructions] And now, operator, please open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Andrew Abrams from JG Capital.

Andrew Abrams - JG Capital, LLC

A couple. First, can you give us an idea of what your cost down was, and how that broke out between materials and factory?

Andy Yang

We actually don't breakdown into materials and factory. And, as we mentioned in our earlier session, the component cost down was around 3% in first quarter. And the guidance for component cost down in the second quarter will be around 2.5%.

Andrew Abrams - JG Capital, LLC

2.5%, great. That's helpful. Thank you. As far as what you're seeing now in your 4K product, I think, last quarter, you had talked about a 30% premium. I know there's a number of other models out from other panel manufacturers, are you still seeing a 30% premium on those products, or has that changed at all for you?

Michael Tsai

It may change through the material cost down, and improvement this year for 4K panel price. We skew target to head within under 1.3x versus UHD.

Andrew Abrams - JG Capital, LLC

So your target is still the same as it was before.

Michael Tsai

Yes.

Andrew Abrams - JG Capital, LLC

1.3. Okay, got it. And lastly, can you talk about what the status is of your OLED development projects? Are you sampling at this point or is it still in the R&D stage?

Fu-Chi Hsiang

This is F.C. speaking. OLED project, right now, we are doing, still call that sampling production right now. We provided mobile phone panels for the Chinese telephone makers.

Andrew Abrams - JG Capital, LLC

But you're not mass producing at this point. Do you expect that sometime this year?

Fu-Chi Hsiang

Actually our OLED capacity is not so huge. We are concentrated to have the mass production for [indiscernible] applications in Q2 and Q3.

Andrew Abrams - JG Capital, LLC

Okay. So you do expect to produce volumes at least in some point this year, second quarter or third quarter of this year.

Fu-Chi Hsiang

Yes, that's right.

Operator

And your next question comes from the line of Jamie Yeh from Barclays.

Jamie Yeh - Barclays Capital, Research Division

I have 2 follow-up questions from afternoon section. First off, we saw the 4K2K. You mentioned that, the AUO target is 15% of your TV shipments for this year, and I wonder what is the penetration now? And, if this 15% serves the entire 2014, or it's year-end numbers?

Michael Tsai

Yes. For our 4K2K panel shipment, yes we still try to target 15% of our total TV panel shipments.

Jamie Yeh - Barclays Capital, Research Division

And also you talked about your expected global penetration should be somewhere around 6%, which is TWD 12 million to TWD 15 million. And do you expect that this is including the so called, low-end 4K, I mean the fake 4K models, or it's -- pure 4K already can have 6% fixed percent of total TV?

Michael Tsai

I don't have any comment about the fake 4K, but for AUO, we're still in very beginning stage, we have only produced a real, our TV 4K. So I think that our target for this year's 6% penetration rate account for TWD 12 million to TWD 15 million to a kind of the fewer borne number this year.

Jamie Yeh - Barclays Capital, Research Division

I see, I see. And my second question is for the touch product, that's earlier, we see that the EPP version 1 and 2 for last year, and what's the plan. I think you will also have an on-field solution, what is the progress. And also, which timeframe that we can expect and what kind of penetration market share you can share with us for notebook touch?

Fu-Chi Hsiang

Okay. This is F.C. speaking. Basically, our EPP version 2, we are in the mass production phase right now. That's really the TP, notebook with TP, since Q4 last year reduced the overall worldwide penetration rates, is not so optimistic as we expected earlier. However, this year we do see penetration, we hope that notebook with touch is probably similar to guided last year for the 10% to 12%. We are using so called, EPP version 2, our generation tool to do it a mass production, and our touch rate would be similar by the worldwide penetration rate. Concerning our products, the oTP and other generation, which we are ready for our customer central evaluation, and we are planning to have mass production by second half of this year.

Jamie Yeh - Barclays Capital, Research Division

Okay, So should we -- we should see some new models for notebook that will start to use the oTP to unsold solution by AUO?

Fu-Chi Hsiang

Yes. In Q3, our customer was not the project, however, it goes to the market, we see only to work with our customers. In our estimation, probably by Q4 this year, or maybe February of next year.

Jamie Yeh - Barclays Capital, Research Division

I see. So do you expect the margin profile for oTP is better than EPP solution?

Fu-Chi Hsiang

Definitely, yes, because we are using our total so called, integrated process and design to produce this so called oTP solution. So, we definitely will demonstrate our competitiveness on the product and, of course, our customers is welcome such kind of proposal so far.

Operator

And your next question comes from the line of Arthur Lai from Citigroup.

Arthur Lai - Citigroup Inc, Research Division

This is Arthur Lai calling from Citigroup. So, we understand your strategy make this result better than expected. Can you remind us how much dark [ph] input capacity in your Gen 5 LTPS line in Singapore? And also, how many 5-inch LTPS smartphone panel can ship if you run into foreign transaction? And who is your smartphone LC and module maker in China? And lastly, in Chinese earning call, you talk about your auto panel focus, and can you also remind us how much percent of those auto panel revenue make up of the first quarter sales. So this is my 3 question.

Pearl Lin

Build-in capacity, we had Gen 3.5, and Gen 4.5. So for our Gen 4.5 in Singapore, so far our earning capacity is around 40K sheet per month. Yes. So, for your questions, 5-inch, how many we can cut, it's 2 million units for 5-inch equivalent. Do we answer your questions.

Arthur Lai - Citigroup Inc, Research Division

Yes.

Pearl Lin

And for the auto or the car display, this year we will target 30% of the growth rate. As you know, the car with the internet is a growing trend. So right now, not only the high-end car will embed the car display. Right now, the mentioned car also are move to the car display. So the industry growth that we can enjoy that double-digit this year. And as you know, right now AUO is the worldwide top 3 display supplier for the car display. So this year, we're also trying our best, when target to grow the 30% ROI this year. This is the company target.

Arthur Lai - Citigroup Inc, Research Division

Also, can you quantify or estimate that, how much percent revenue at first quarter, if you are not convenient to give us a number, would be 5% to 10%, or above 10%?

Pearl Lin

As you know, the small and medium, the car is still capitalized of this small, medium. So you do have a percentage of our small medium, the total revenue. So, car is a part of that. So right now, still less than 10%.

Arthur Lai - Citigroup Inc, Research Division

Okay. And lastly, who is your smartphone LC and module maker in China? Because we do think that's maybe important, differentiates structure from [indiscernible] or Korean, small and medium panel maker?

Pearl Lin

Arthur, I don't think this question is relevant. Usually, we do not comment on this, I'm sorry about this.

Operator

Your next question comes from the line of Clare Kim [ph] from Daishin Securities?

Unknown Analyst

This is Clare Kim [ph] from Daishin Securities. I have 2 questions, and first one is about the improvement on the changes in working capital from your cash flow statements. And since that the changes improves by 60% if I compare that number with the number from the one year ago, and what is the major vision of improvement in changes in working capital, is that because of the inventory control or is there any other issues, and there will be another follow-up question?

Andy Yang

Improvement in the working capital management, as you said, were mainly from the inventory management, as well as all other factors.

Unknown Analyst

Okay, and the second question is about UHDTV panel. And, the target shipments for this year is 15%, as far as I know. And what's your target behavior in terms of the UHDTV for this year, and I imagine that number could be much larger than just 15% in terms of the area, is that true?

Pearl Lin

Yes, Clare [ph] as you know right now our 4K product is ranging from 42 to 65-inch. And so far, this size is still above the worldwide average and the company size average, so of course, in theory, if our unit target is 15%, then the area has the chance to be better than 15%.

Unknown Analyst

And could you give us any color on that number in terms of the area shipments for 4K2K TV?

Pearl Lin

Okay. Right now, as you know, all of our guidance is still in unit basis. So, so far we don't have the area basis guidance so far.

Operator

[Operator Instructions] Your next question comes from the line of Jerry Su from Crédit Suisse.

Jerry Su - Crédit Suisse AG, Research Division

I just have 1 question regarding your strategy for different fabs going forward. We have noticed that last year, I think, our 39-inch and 50-inch were some good products, and gaining a lot of attention from the consumers. Just wondering, what's your plan for this year in terms of new sizes, and also that, I think there is also a shortage or tight supply for 42-inch product, and how are you going to allocate your capacity to address that market?

Pearl Lin

Jerry, you know the technology is improving. We are also trying our best to maximize our cost efficiency. So, this year, so far, we also are planning to launch some 43-inch product. And also, as you know, right now our larger size are getting more and more popular. So, we are also trying to introduce some bigger sizes, such as 75-inch and 85 inches, maybe in the second half, this year.

Operator

Your next follow-up question from the line of Arthur Lai from Citigroup.

Arthur Lai - Citigroup Inc, Research Division

So, recalling the Chinese earning call, you mentioned that there is a progress on high resolution by amorphous, so can you remind us what's the technology about and also, will it demand in your more Gen 5 capacity, because you also mentioned this quarter you expect loading rate to go up. So are the Gen 5 capacity being sufficient from these product taking off, this my question?

Fu-Chi Hsiang

Arthur, this is F.C speaking. Basically, due to the strong market demand, especially in the mobile phone segment, actually our Gen 5 capacity is 40 books [ph] right now.

Arthur Lai - Citigroup Inc, Research Division

And, so you can use Gen 5 to produce over 300 PPIs panel, so it's the right situation?

Fu-Chi Hsiang

Yes, you're right.

Operator

Your next question comes from Jamie Yeh from Barclays.

Jamie Yeh - Barclays Capital, Research Division

I want to follow up that you have good strong targets for the 4K2K, and do you expect any potential or complement shortage for the 4K, because I think from -- earlier from comments about the shortage on the IC side, I'm not sure if that is valid or not this year? Will that be a risk that we need to configure?

Pearl Lin

Jamie, I think, so far, we haven't seen any complement shortage so far, but we will closely watch, pay attention to it.

Jamie Yeh - Barclays Capital, Research Division

And the other thing is on-field, earlier we talked about on-field oTP on notebook, and I wonder, what is the progress of unfilled on smartphone and what would be the penetration target, and what we should expect on the margin. Is that the higher margin product for smartphone panels?

Andy Yang

Basically, the smartphone, our sales solution, only applies for the so-called low-end smartphone panels. But however, for the high-end or middle-end, such kind of applications do have some kind of the performance and limitations. So basically, on-field smartphone panel, only applies for such kind of low-end applications only.

Jamie Yeh - Barclays Capital, Research Division

I see. So I think that could be only like a 10% to 20% of fewer smartphone shipments. I mean, the cap was just 10% to 20% before we see any improvement of economy?

Andy Yang

Yes, you're right.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Abrams from JG Capital.

Andrew Abrams - JG Capital, LLC

Just a clarification if you could. When you break down your revenues by application, the CP and other categories, can you break them down a little bit so we know kind of what they really are?

Pearl Lin

Sure. The CP means the consumer product. So, in theory, it's including the mobile phones and car display. And we also have some audio/video products or some niche products.

Andrew Abrams - JG Capital, LLC

And the other category, the 8% category, what falls into that one?

Pearl Lin

So, that's including the ...

Andy Yang

Solar business and other components business.

Andrew Abrams - Avian Securities, LLC, Research Division

Solar and components, okay, got it. And would the OLED business fall into the consumer category or would that fall into one of the others?

Andy Yang

I think the application would go mostly to the variable devices in the future. So, I think it will be categorized into CP.

Operator

[Operator Instructions] .

There are no further questions. I would now like to hand the call back to the management for closing remarks.

Pearl Lin

If there are no more questions, we're going to end the conference call. We thank you for your participation. For those who still have questions, please do write to us to ir@auo.com. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect. Have a nice day.

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