AU Optronics Corp. (NYSE:AUO)
Q2 2014 Earnings Conference Call
July 30, 2014, 08:00 AM ET
Pearl Lin - Investor Relations
Paul Peng - President and Spokesperson
Fwu-Chyi Hsiang - Executive Vice President and General Manager, Mobile Solutions Business Group
Michael Tsai - Senior Vice President and General Manager, Video Solutions Business Group
Andy Yang - Chief Financial Officer
Sharon Shih - Morgan Stanley
Jerry Su - Credit Suisse
Jamie Yeh - Barclays
Robin Chen - Merrill Lynch
Investors, friends from the media, ladies and gentlemen, good afternoon. I am IR Officer Pearl Lin. Welcome to the second quarter results investor conference.
Today, we have four speakers, Mr. Paul Peng, the President; Mr. F.C. Hsiang, Executive VP and GM of Mobile Solutions Business Group; and Mr. Michael Tsai, Senior VP and GM of Video Solutions Business Group; and Mr. Andy Yang, our CFO.
The agenda today is as follows. First of all, we will have a Q2 financial results and Q3 outlook presentation, followed by a business update, and then we will have a Q&A session on the previous submitted questions from our investors. Four speakers will be answering these questions in the session. If you have any further questions, we will open the floor for you to call-in and submit your questions. This will be our agenda for today.
Now, before we invite Mr. Andy Young to give his presentation, I will like to remind you that all of our future predictions have its risks, and I will like to invite you to spend a few minutes to read the second slide Safe Harbor Notice.
Now, I turn the floor over to Mr. Andy Yang.
Good afternoon. On behalf of AUO, I would like to report to you our comprehensive income. In Q2, our consolidated revenue bridged TWD102 billion, up 9% Q-o-Q. What's worth noting is that our net profit bridged TWD4 billion in this quarter, which was the four-year new high, mainly because we continue to improve our product mix and our cost structure as well as the Q-o-Q increases in panel market prices.
As a result, our operating margin and EBITDA margin and gross margin improved significantly Q-o-Q. As a result our EBITDA margin rose by 18%, in terms of non-operating income, because we disposed some long-term investments, which provided some more income and also we have Forex gains. Overall, our non-operating income reached TWD270 million, resulting in a net profit of more than TWD4 billion.
Now, our balance sheet highlights. For the second quarter, our cash and cash equivalents was TWD76.5 billion. Our inventory improved to TWD35.2 billion and our inventory turnover days dropped to 36 days. This show our improvements in inventory management. And owing to our continuous improvements in debt reduction, we posted profits for the fifth consecutive quarter. Therefore our net debt to equity ratio improved to 51%. This is an evidence of our improvements in financial structure.
Next slide, cash flow highlights. Our cash flow from operating activities continue to improve and our Q2 CapEx was around TWD5 billion, net changing debt was around TWD8 billion. Overall, our net changing cash increased by TWD3.5 billion.
Next slide, revenue breakdown by product applications. This is the first quarter that we highlighted the revenue share of mobile device panels. As you can see this year our mobile device panels continue to rise and the share of conversion to other panels also was up slightly. So comparatively, the share of TV dropped sequentially. This was in line with our strategy.
Next slide, display revenue breakdown by size. 50-inch and above panels and 10-inch and below panels, in these two segments our business rose. This is in line with our strategy to move to larger screen and bigger resolutions small and medium sized panels. This shows that we continue to move toward the sectors with higher entry barriers. We are doing this because we want to sidestep the areas in which there is a bigger price competition.
Next slide, consolidated shipments and ASP by area. In the second quarter, we are about to enter a peak season, so our shipments by square meter was up by 7.6% Q-o-Q, as for ASP per square meter owing to the Q2 market price slight increase as well as our increased share in the small and medium panels. The ASP was up by 1.9% Q-o-Q.
Our small and medium products, as I have talked about in Q2, we are entering our peak season, so the shipments in square meter rose by 48% Q-o-Q. This is our small and medium panels, and the revenues also rose by 28% Q-o-Q.
As for our Q3 outlook. Looking forward to the third quarter, large-size panel shipments owing to capacity constrains and the move toward larger size screens, we expect to see our larger size panel shipments to be flat or down slightly. However, because our continued improvements in product mix, ASP maybe up slightly in terms of small and medium panels, because Q3 is traditionally the high season, so we expect we will have mid-to-high single-digit in shipments growth.
Ladies and gentlemen, good afternoon. Thank you for your participation in today's conference. In the second quarter, because of the World Cup, we have seen a surge in the sales of TV in Latin America. As for emerging markets in terms of PC, because of decommission of Windows XP and also upcoming replacement cycle, we see a surge in the demand. And now we see a very tight relationship between supply and demand.
In terms of TV and PC panels, there has been an increase for AUO, because of a beneficial external environment and internal operations, we have reached our full capacity, we have good product mix and also cost down policies. We have seen a quick surge in our profits in Q2 and it has reached highest in the past four years. In fact, in our first half year, we have reached the equal profit of our entire year profit in 2013.
Our net debt-to-equity ratio has decrease from 95% to 51% in 1.5 years. Our inventory turnover has lowered to 36 days, and it is the lowest in the past 4.5 years. Q3 will be a peak season, so we will see a restocking demand for the mainland China Golden Week and also the upcoming holidays in Europe and the United States.
The China inventory is at a healthy level, and because as mentioned before, our capacity has reached its peak. So we will turn to optimizing our product mixes and also increase premium product percentage.
In the short-term, since we cannot expand our capacity, so we will turn and focus on increasing our quality instead of quantity. We aim to diversify our technology and increase high value-added product percentage and aim to increase our profitability.
Hopefully, we will see the results in 4K TVs, curve panels, large sized panels and average panel size will be higher than a worldwide average. AUO is currently the largest manufacturer for 65-inches panels. As for smartphones, we'll focus on large panel size and higher resolution products.
WQHD is one of the leading products and one of the most popular. In car displays, we have seen an increase in applications. We have already successfully entered the custom market in Japan, Korea and Europe. Integrated touch for panel, we will see a surge in its application. As a results, we hopefully by optimizing product mix, we will be able to continue to profit and few-to-more give back to our investors. Thank you.
Next, as usual. We have collected questions from analysts, and like to firstly provide our feedback to the questions as usual. The first question is about AUO's views about market and our expectations for the future outlook? There is questions about supply demand in 2014 and 2015. With regards to 2014 supply and demand, we'll have Michael to provide his feedback.
Good afternoon. In 2014, in the TV segment owing to FIFA World Cup and better than expected demand for larger size TVs, we expect that TV panel size on average will grow by 1.4 inches worldwide. For full year, the area growth of TV panels will grow by more than 10%.
In terms of IT segment, which includes monitor and notebook panels, owing to the sunset of Windows XP service, there was a surge in replacement cycle. In addition, demand for commercial models also recovers. Therefore, overall, we have seen a recovery in demand. As a result, the decline is expected to be less than 5% this year.
For tablets, owing to the impact of larger screen smartphones and lower cost models, the growth momentum shrink a little bit. As a result, the demand is expected to be flat or to have single-digit growth.
As for smartphones, we expect that worldwide we'll have a 25% growth this year, mainly because the rapid penetration rate in China and emerging markets, and we also believe the products will move to larger screen sizes and higher resolutions. According to market research, demand for area growth will likely grow by 7% to 9% this year in entire world. However, the supply area growth will grow by 5% to 6%, therefore we remain cautiously positive about the supply and demand.
This is Paul. I would like to share our views on the 2015 supply and demand. In 2013 and 2014, supply has been smaller than demand. Looking forward to 2015, there will be new capacity added, but according to market research, capacity in 2015 will be up by 5% to 7% in terms of demand. TV and mobile handsets are increasing their demand for bigger sizes and also the demand for IT product stabilized. Overall, demand is recovering.
One estimation that we often use is that 1-inch increase in TV panels translates to a 110-K sheets of capacity of a Gen 8.5 fab. This translates to 3% of panel area worldwide. As a result, as products continue to move to a bigger screen sizes, the demand for glass area also increases. So this is our outlook for supply and demand in 2015.
Our investors would also like to know the update on the inventory and also the second half demand outlook in major regions. Also taking into consideration will be the Golden Week in mainland China and also the upcoming holidays in Europe and the United States.
In various major regions, starting from the United States market, the sell-through for the second quarter will turn positive and the demand for over 50-inch panels grow strong. The percentage of these products remains high over 20%. In the second half, we will see the peak season of the industry and also upcoming holidays, so it is estimated that we will see an increase in the U.S. market.
As for the mainland China market in 2013, the first half of there were still energy saving subsidy, so there was a high base. After the policy ended, the TV market came back to normal. For 2014 worldwide for January to May decreased. However, in June in one single month due to the World Cup, we saw a worldwide growth reach 40%. It is estimated that in the second half of this year, because all brands will focus on the domestic market, so the market may resume a positive growth.
In the European market, also again, because of the World Cup, the total sales was better than expected. For the second quarter, the Y-o-Y had positive a growth of 15%. This is the first time that a single quarter has saw positive growth, first positive growth in the past two years. The European market will have a gradual economic recovery. So we may see markets stabilization in TV demand.
In the Japanese market for the first half, the total sales growth was around 4%. For the second half driven by the replacement cycle, it is expected to maintain positive growth.
In emerging markets Latin America, because of the World Cup in the seven quarter, the Y-o-Y greatly increased 50%. In the second half, it is estimated to resume to normal market mechanisms.
For inventory notebooks, the inventory levels for notebooks are higher due to the back to school season, however, it is still considered healthy for a pre-holiday period. For set inventories for other applications, it remains healthy. On average the inventory for TVs is six to eight weeks, for monitors four weeks and notebooks around five weeks.
The expectation sell-through for World Cup, the Golden Week in China and the Black Friday in the United States, the World Cup drove up the TV sales in Europe and Latin America. In Europe, because of the economic recovery and also the World Cup, Q2 saw a sell-through Y-o-Y increase of 15%.
In June, alone there was a more than 2-inch size increase, when compared with the same period of last year. As for Latin America, Q2 sell-through Y-o-Y was 50% and the sell-through for 39-inch and above is over 50%. Again, in June alone, there was a more than 2-inch increase when compared with the same period last year.
For the Golden Week in mainland China, the market has returned to normal. For the first half, the brands are aggressively focusing on overseas market and for the second half they will turn their focus back to the domestic market. So it is estimated that Y-o-Y, we'll have an opportunity to see a positive growth.
For Black Friday in the U.S., the major brands are preparing to actively promote their sales and the Chinese brands are also aggressively trying to enter the overseas market. This year there were more promotions on large panels. This is different than the past two years, because in the past two years, the focus is on 32-inch panels. So hopefully, this would increase the growth of average size panels and large panels.
Thank you, Michael. We just gave our updates on the global market and outlook. Next, I would like to provide our feedback to financial related questions. Our Q2 utilization rate was around 95%. And as we mentioned, the guidance is for Q3 to have a similar level. In Q2, the component cost down was close to 3%. And for Q3, the guidance is for component cost down to be around 2% to 2.5%.
Regarding depreciation, Q2 we had around TWD14.5 billion in depreciation expense. For the full year, we expect the amount to be close to TWD58 billion. In Q2, we had a CapEx of TWD5 billion. For full year, the CapEx expected to be around TWD20 billion to TWD25 billion.
As for capacity, as Paul mentioned, we do not expect to ramp our capacity in near-term. In terms of balance sheet and liquidity, our net debt-to-equity ratio was down to 51%. This is a new low in recent years, showing significant improvements in our financial structure. As for liquidity, our cash and equivalents totaled TWD76.5 billion, which was far more than the TWD49.8 billion in debt due within one year.
Moreover, about our Kunshan plant, the Gen 6 LTPS progress, right now we are negotiating with banks in China regarding funding. So our plan is the same, as soon as we have funding in place, we will consider our further plans in accordance with market conditions, but the plan is the same to kick off this plant into operation in 2016.
There is also question regarding CapEx of this plant. We do not have specific number right now, but the plant is basically similar to what we had mapped out in the past. For the phase one, the CapEx will be around TWD50 billion and the investment will be allocated over the course of several years.
Moreover, about the questions regarding AUO's key products and technologies, there are many questions regarding additional capacity in China and how it will play against AUO and what are the advantages of AUO in terms of our competition against Chinese peers.
Besides the top-five panel suppliers, Chinese panel makers are probably the most aggressive players in the market. Chinese makers are right now committed to adding up their capacity for 8.5 Gen -- besides the top-five panel suppliers, Chinese companies are perhaps the ones that are most aggressively investing in new fabs.
Chinese companies mainly concentrated on spending Gen 8.5 capacity, but there is glass efficiency constraint. On the other hand AUO continues to differentiate ourselves. We have a wide variety of panel sizes. We also are able to provide high value-added products. For example, we have high-definition products, WQHD, 4K, curve TV panels, Wide Color Gamut and Narrow Bezel products, so we are able to help our customers to develop high end-products.
Moreover China's market is relatively saturated. And many TV brands from China are aggressively expanding to overseas markets including U.S. and Latin America. AUO will continue to work with TV brands in China to expand overseas.
Moreover in terms of exports AUO's patent portfolio is one of our biggest strengths. So facing the competition from Chinese panel makers, we believe we still have good lead over our Chinese peers.
Regarding our expectations for the outlook of the TV market, we think there is some defined trend including 4K curved technologies and larger screen sizes.
We will like to have Michael to take the questions.
AUO is unlike our competitors. We focus very much on providing best values to our customers and consumers. So in terms of 4K technology progress, we want to make sure that 4K can really bring out the best values to our customers and consumers. So initially, we placed our focus on high end and 50-inch and above of 4K panels.
Overall, 50-inch and above panels now have become the mainstream of the 4K TV panels. We also expect that the sales of such panels will continue to rise. Currently, 4K inch and above TV panels account for a 60% to 70% sales. This tells us that our focus on large size TV panels is on the right direction. As for the market right now, besides China, Europe and U.S. will be our next target markets for promoting more 4K and larger size TVs.
Moreover, AUO works to enhance our 4K and curve TV technologies, so as to improve our market share in high-end TV panels, as the 4K TV panel technology continues to be increasingly adopted by consumers. We continue to work on providing more technology and panels to the market, now we are able to mass produce 42 inch, 55 inch, 65 inches, 75 inch 4K curve TV panels. This will help us to differentiate our customers against our peers and also lift market entry barriers.
Now, about our developments in curved panel technologies. Last year in July, AUO launched the world's first curve TV panel. We launched this very first curve TV panel back in 2013 as the world's first company to do so. We also gradually rode out curve TV technology into 4K TV panels.
As we can see many leading TV brands are promoting their curve TV sets. So in May, the worldwide sales of curve TV reached 30K units.
This year in the first half, we launched a new generation 4K curve TV panel. I believe AUO is one of the world's very two companies that are able to provide 4K and curve technologies. Looking forward into this second half, we will launch our second generation 4K curve TV panel. This panel will come with 4,000 millimeter and optimal curvature.
This will make AUO the very first company in Taiwan to provide 4,000 millimeter 4K curve TV panel. And we have the ability to mass produce this kind of panels. We expect to mass produce this kind of panel by the end of this year.
Many more TV brands are promoting their 4,000 millimeter TV sets. We believe this will increase the cost competitiveness of LCD TV panels against OLED TV panels. 4K TV panels is very unique in its technology. AUO has what it takes to develop such kind of technology.
We have developed [ph] VACOA and narrow bezel technologies. We are one of the very few panel makers that are able to provide new generation curve TV panels. It is our hope that we can meet our clients' demands for differentiated products and also improve their profitability.
Regarding large size TV panels, AUO shipped the large size TV panels that AUO shipped are 2-inches larger than the worldwide average. And the 50-inch and above panels that we shipped now account for more than nearly 30% of the total compared to the global average 15% AUO's share significantly higher. And we will continue to focus on 50-inch and above panels.
Moreover in 65-inch we are the leading brand on top of which we continue to increase our share in large size panels in the commercial segment, so we are continuing to focus more on the large size panel shipments.
Thank you, Michael. Our investors may also have questions concerning small and mid-panels implemented on smartphones, smartphones especially LTPS and Hyper-LCD, also on car displays. The updates on the strategy and AUO's strengths, I would like to turn the question to F.C.
I will give a brief update on the applications on smartphones and car displays. We see more and more Chinese new brands popping up, and also a fierce competition in the global smartphone market. For AUO, we have the advantages of flexibility, product development and a variety of panel technology.
We have already successfully established a mid high-end position in the mainland Chinese market. AUO also has the capacity for both amorphous and low temp. The company deploys different focuses on different products, and also prioritizes resources on premium products. This pulls up the entry barrier and also improves the products ASP.
Our current plans for low temp products are to imply them on high-end larger than 400 ppi smartphone products including full HD with in-cell touch and WQHD smartphone panels.
Last year, AUO was the first to introduce 6-inch WQHD smartphone panels was the highest resolution. In Q1, the model was very popular in the mainland Chinese market. And international brands gradually catched up with the trend and gradually introduce WQHD smartphones.
AUO continues to be the first to provide customers and clients with the latest products and assist our clients to maintain competitive edge in the market. Currently the company is actively designing in new sizes such as 5.5 inches, larger than 500 ppi WQHD products. And we estimate to mass produce these products in the third quarter.
In full HD in-cell touch products, it is planned to be mass produced in the fourth quarter. For the amorphous base Hyper-LCD panels, it can support the cost competitive full HD and HD720 panels. As for, the larger than 300 ppi products, AUO's capability is at least six to nine months advance than our peers.
Last year, AUO successfully won the popular 4.7 inch HD720 model. Currently, the panel demand is much larger than the supply. It is estimated that AUO has around 30% worldwide market share for HD720 products. In this year's second half, AUO will push the amorphous on full HD panel to reach mass production.
Now, let's look at applications on car display panels. As cars become more smarter, we see an increase in demand in the car display panels. More and more cars are equipped with these panels and it is estimated that there will be a double-digit growth. For the car display panel markets the main value is in the big four markets.
However, the qualification periods for these panels are quite long, about two years, and specs and quality are strictly regulated, therefore the entry barriers are very high.
In the past few years, AUO has focused on the big four market and in current now we have successfully entered the supply chain in Japan, Korea, the U.S. and the EU markets. We continue to expand our market share in car display panels.
In the past few years, AUO focused on the big four market and has successfully entered the cluster of supply chain for Japanese, Korean, America and European brands. We continue to increase our market share in car display panels. Besides basic car display panels, AUO is the leading company in providing the total solution for our touch panels.
The penetration rate for capacitive touch on a car displays in the second quarter has reached 15%. This is significantly higher than the worldwide 7%. This also proves that we have established a very good image in the international arena.
Ladies and gentlemen, now, we'd like to open the floor for questions. To make sure that everyone has equal opportunity, please limit your questions to two per call. Thank you for your cooperation.
(Operator Instructions) Our first caller is Sharon Shih from Morgan Stanley.
Sharon Shih - Morgan Stanley
I am Sharon from Morgan Stanley. Firstly, I would like to congratulate you on this stellar growth. You beat your Korean peers on operating margin and EBITDA margin.
I have two questions. Firstly, looking for to the second half, especially the third quarter, it looks like the supply is rather tight. Now, we are moving toward 50-inch and above and 10-inch and below panels. Could you give us your guidance for Q3 EBITDA margin? Do you see the EBITDA margin to continue to improve?
Secondly, I'm interested to know the developments of new specs of TVs, especially regarding wide color gamut features. Do you see this become a new spec for TVs next year? And what is AUO doing to prepare for this new trend?
This is Andy. With regard to your first question, as you know we do not have guidance for profitability. We do not have plans to ramp up our capacity. So what we are going to do is, firstly, we will continue to optimize our product mix. So the trend is to continue to improve our product allocation of 50-inch and above and 10-inch and below products.
Moreover, we need to know that cost structure changes and unit cost of components and price movements all have various profitability. But all-in-all, we are rather confident in our profit outlook for Q2. All-in-all, for Q3, we are rather confident that we will be able to maintain our profitability level.
Secondly, regarding the wide color gamut feature of TV panels, we have Michael to answer the question.
Actually, we have developed new wide color gamut products for a long time. Last year, as you know a international TV brand had a very popular wide color gamut product. This shows our success in the market. For this year, we're introducing next-generation wide color gamut products to customers.
We want to broaden the color gamut of our products. And we are able to meet our client's requirements based on their specific demands, because AUO has good enhancements in LCD technologies. We are able to provide flexibility to our customers, so they can go for higher value products. They can also provide more economical, more cost effective, more cost competitive wide color gamut products.
In terms of economic wide color gamut products, we can also provide open-cell solutions to our customers. So wide color gamut product is scenario that we work very hard on.
Moreover, we launched our second generation 4K curved TV with 4,000 millimeter optimal curvature. This technology can also be combined with wide color technology, wide color gamut technology.
According to market research on TV users, visual quality actually is among the top of the wish list of the consumers. What does this mean? It means that customers want to have high-resolution, high-color saturation.
For panel makers like AUO, what we want is to meet our consumers, our customer's need. We want to make sure that they can have the color saturation, the color gamut that they want. So wide color gamut, we believe will be a more popular product in the future.
Sharon Shih - Morgan Stanley
Can I have a follow up question? Wide color gamut is right now mainly applied in TVs. Has it been applied in smartphone or tablets?
Because TV users are in front of the screens for a longer period of time, so they have higher demand for color saturation. But of course, wide color gamut technology can be applied into other products as long as consumers have such need. Of course, we can transfer the technology on to more kinds of products.
Our second caller is Jerry Su from Credit Suisse.
Jerry Su - Credit Suisse
I have two questions too. Firstly, regarding small and medium products. Could F.C. talk about AUO's market share in smartphones and tablets markets? And also has the price competition is somewhat, as we just mentioned that HD720 is in tight supply over Japanese companies are introducing HD720 products into the market. I would like to know your view about that. The second question is regarding 4K2K. Could Michael talk about your expectation for the penetration rate this year worldwide as well as AUO's target?
This is F.C. Firstly, on smartphone and tablets panels. In terms of tablets, we provide our products to many IC brands. The sizes of our panels used in tablets range from 7-inch, 8-inch, 10.1-inch. And in the future, there will be products used in tablets larger than 10-inch.
In terms of market share, right now we do not have detailed data, but if you look at the market as a whole, recently the tablet market growth momentum seems to be smaller than expected. So for AUO, we will focus more on producing higher-end panels for tablets. In terms of our client portfolio, we have already seen our efforts paid off. We believe in Q3 and Q4, we will have better results on tablets.
Moreover on smartphones, the overall supply of HD720 products are in tight supply. However, the demand is really strong. Currently, HD720 products are one of the main products supported by our amorphous technology. For second half of the year, we will bring down our amorphous technology to full HD, and for 2015 we expect to see progress in amorphous on full HD market share improvements.
Jerry Su - Credit Suisse
Michael, you mentioned 6% to 8%, did you refer to sets of panels sets. So when you mentioned AUO, did you refer to panels?
Yes, panels. For larger size panels, especially those above 50-inch and 55-inch and 65-inch and above, our goal is to make it 15% of our total share.
Jerry Su - Credit Suisse
Do you have a comment on the pricing of HD720?
Our apologies. We are not allowed to comment on pricing. Regarding 4K, 2K TV panels, in the first half the sell-through was around 3% of the TV sets sold worldwide. For the full year, the penetration rate is expected to reach 6% to 8%. So in second half, 4K, 2K shipment is expected to increase.
As for AUO, our shipments in the first half were in line with our expectations. This reflected our efforts paid in this area. As for our full year performance, we expect that 4K, 2K products will be able to reach 15% of our larger size panel shipments. These include 50-inch, 55-inch and 65-inch panels.
As for new fabs in Mainland China, the new established fabs in 2015 are included in the above mentioned 5% to 7% supply increase. For the year 2016, as far as we know, the combined capacity planned and constructing fabs are roughly 5%. Since constructing projects normally take around two years, so this is what we know so far.
It should be noted that this only covers the area increase, because when calculating capacity consumption, you cannot only view the area factor; for example, if you're producing high-end products such as 4K TV, high resolution and curve TVs, this would consume more capacity and these are not included in the area factor that we mentioned. So this is the estimated supply and demand situation for 2016. In terms of cost down, I will turn the microphone to Andy.
When we are talking about component cost down, for example, if you look at previous Q2 and a future Q3, Q2 not only saw a decrease in raw material cost, improvement in yield rate and decrease in unit cost also contributed to the cost down. The design also helps lower unit cost.
If I remember correctly, when we were giving guides for Q2, it was estimated to be around 2.5%, but actual results now is 3%. I think this is mainly due to the increase of yield rate and redesigning. As yield rate and redesigning is still an ongoing process and not concluded, we have no concrete numbers or statistics for any Q3 guides. Of course, AUO will still work hard to lower the unit cost for better results. I hope I have answered your question.
I know that LCD TV has a much lower cost than OLED TVs. In terms of the differences in feature and performances, I think it really depends on the preferences of the customers. With the exception of response time, I think LCD TV is quite similar to OLED TVs. So if we look at, for example, the price comparison at the moment, LCD TV still have an advantage over OLED TVs.
The next caller is Jamie Yeh from Barclays.
Jamie Yeh - Barclays
I have a few questions. The first question is that we know that Korean peer has resumed their OLED development. I understand that one of the reasons is that there maybe an increase in the OLED TV yield rate. We have talked about a wide color gamut 4K TV and curve TV, so what is the difference for users when we compare the above three and OLED TV? Also, what type of product do you think has the most potential, and if OLED TV proves to be more popular, then what would AUO's reaction be, especially for the mid high-end products?
My second question is that in the second quarter, the cost down is 3%, as you mentioned. Andy also mentioned that afterwards it would probably be only around 2.5%. Can you elaborate on the causes behind the 3% and why it cannot be maintained? My last question is that, as Paul mentioned, it is estimated that next year China will show a 5 to 7 supply increase. From a micro perspective, in 2016, will the Chinese government continue to subsidize more panel production projects or do local manufacturers have plans to increase panel production?
I see. So the yield rates may lead to some upside in the cost guidance in Q3. This is what we hope to see.
Jamie Yeh - Barclays
Again, I have one more question for Paul. I know that curve TV production is not simple, if we compare a product, which combines all three above mentioned feature with an OLED TV, I know the resolution of the OLED TV is not as good, but still I think the formula will be cheaper. Yet are there any qualities that will convince customers to pay the premium?
I will first answer your question concerning OLED and LCD TVs. We have seen our Korean peer actively develop OLED TV and it is not only use by their own brand, but they are also aggressively promoting that in the Chinese market. The LCD TV feature such as resolution, color, slim form factor and bezel, from a customer's point of view is more and more similar to the specs and functions of OLED TV.
Since LCD can also successfully support a curve TV, it debunks the previous mix that only OLED can support curve TV. So are the consumers willing to pay a higher premium for a same spec product? I think this will have to be determined by the market.
AUO has been continuously developing large size OLED TVs, but because of these reasons currently we haven't planned for mass production of OLED TVs. We are still observing the trend for OLED TVs. And the cost structure and supply volume of these TVs may also indicate that it can only be applied in very high-end products. This is our response concerning OLED TV.
Jamie Yeh - Barclays
I would like to ask one last question. You mentioned 5% in 2016, in terms of size migration. In the past we have seen a great progress on average 1-inch per year in terms of TV products. Is it possible that we would see a similar progress in the future one to two years?
Yes, if we look at the market trend, most of the companies are all working on increasing the size. We have see an increase in average size, especially now the set price for TVs have dropped, so most of the consumers are willing to buy a large size TV.
Jamie Yeh - Barclays
In the future two years we estimate to see a large increase in the size. In the past two years, we see annual growth of 1.5-inch per year. So you mean that in 2015, 2016, we can expect to see a 1.5-inch growth per year, that would not be a very aggressive assumption.
Yes. I think that is possible.
Jamie Yeh - Barclays
And that concludes my questions. Thank you.
In the interest of time, we'll have our last question. Our last caller is Robin Chen from Merrill Lynch.
Robin Chen - Merrill Lynch
Firstly, congratulations on this better results of this quarter. I have two questions. First question is regarding the full HD and HD720 small and medium size products. You mentioned that you plan to have full HD -- more of a sound full HD to have mass production this year. My question is about LTPS process. In terms of LTPS process, how do you see yourself compare with Japanese peers in terms of performance and cost? If you see yourself as competitive, would you continue to invest in the Gen 6 low-temp fab?
The second question is regarding your dividend policy as you have good cash flow. And relatively to healthy CapEx, do you have any plan for dividend payouts?
I'm F.C. Regarding your question about full HD, we have two strategies for full HD products. For high-end products we use low-temp technology to develop full HD products with in-cell touch. As for low-end products, we use amorphous to support the production of full HD products. In fact, there is no conflict between these two categories. As a result, it does not affect our investment plan for Gen 6 low-temp fab.
Robin, you asked about our dividend policy. Based on our past history, AUO has a higher dividend payout ratio than our LCD peers. In the past, whenever we had profits then we paid out dividends. When deciding the ratio of dividend pay out we will look at our cash position and the funding needed for supporting future growth, and of course investor returns. So these are the factors that we will think about in giving our cash dividends.
Ladies and gentlemen, this concludes our results conference call. If you have any question, you're welcome to contact the IR department of AUO. Thank you.
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