AU Optronics Corp. (AUO) Q4 2014 Earnings Conference Call January 29, 2015 1:00 AM ET
Executives
Pearl Lin - IRO
Andy Yang - CFO
Paul Peng - President
Michael Tsai - SVP & GM of Video Solutions
F.C. Hsiang - EVP & GM of Mobile Solutions
Analysts
Sharon Shih - Morgan Stanley
Arthur Lai - Citigroup
Jerry Su - Credit Suisse
Jamie Yeh - Barclays Capital
Pearl Lin
Good afternoon, ladies and gentlemen. I am Pearl Lin, the IR Officer of AU Optronics. On behalf of the Company, I'd like to welcome all of you to participate in our 2014 Q4 results conference call. Joining me here are four executives including Mr. Paul Peng, our President; Mr. F.C. Hsiang, Executive VP and GM of Mobile Solutions Business Group; Mr. Michael Tsai, Senior VP and GM of Video Solutions Business Group and Mr. Andy Yang, our CFO.
The agenda for today is as follows. Firstly, Andy, our CFO will recap some of the key points of our Q4 results and provide you with our expectations of Q1 outlook. Then Paul will give you our business update and provide you with our outlook for 2015. Then we'll move into the Q&A session. We will first provide our feedback to some of the previously collected questions from analysts. Then if we still have time, we will open the floor for questions.
Before Andy provides you with our fourth quarter results, I would like to remind you that all forward-looking statements involve risks and uncertainties and please take a minute to read our Safe Harbor notice on slide number 2.
Now I'd like to hand over the call to Andy.
Andy Yang
Good afternoon. Last year in Q4, our revenue dropped slightly from Q3. However, owing to our cost control improvements and various schemes our operating margin achieved at 4.8 -- 8.4% to TWD8.8 billion. And our EBITDA margin reached 21%.
Next slide, for the full year. For the full year, AUO recognized revenue of TWD408 billion, although slightly smaller than 2013. However, our operating margin was larger than 5% and our net profit improved significantly to TWD18 billion compared with TWD4.2 billion from a year ago. And our basic EPS reached TWD1.83. ROE also returned back to more than 10%, which is a relatively healthier level.
Slide number 5, balance sheet. Inventory in Q4 was up slightly than Q3. However inventory days stayed at a very healthy level of 36 days.
As for debt in Q4, we continued to reduce debt. At the end of last year in Q4, for the full year we reduced debt by TWD42 billion owing to further debt repayment and a net profit.
Our net debt to equity ratio improved to 30% which was roughly half of that in 2013. This reflects that our financial structure continues to improve.
Slide number 6, cash flow. At the end of Q4, cash flow from operating activities came in at nearly TWD18 billion.
Our CapEx was around TWD3 billion. So for the full year CapEx was roughly TWD17 billion which was slightly lower than our previous guidance as some of the expected expenditure will be allocated to 2015.
We also are very aggressively reducing debt. Net change in debt in Q4 was TWD10 billion and for the full year we reduced debt by a total of TWD42 billion.
Slide number 7, revenue breakdown by application. TV panel shipments stayed very strong in Q4 and price remained rather flat. However, mobile PC which includes notebook and tablet PC panels saw both declines in ASP and shipments. So overall, our TV panels share grew by 2 percentage points and mobile PC segment lost share by 2 percentage compared with a quarter ago.
Next slide, revenue breakdown by size. Our 50-inch and above panel ratio continued to improve compared with the fourth quarter 2014. The 50-inch and above segment had a ratio of 19% while at this quarter which was the fourth quarter of 2013, the ratio stood at 26%. This reflects our achievement in continuous optimization of our product mix.
Next slide, shipments by ASP and area. Our shipments in square meter dropped by 1.8% QoQ to 5.95 million square meters in Q4. And ASP per square meter was down by 3% mainly due to product mix changes and the mobile PC price -- mobile PC panel price fluctuations.
Slide number 10, small and medium products. As Q4 is the slow season for small and medium products, so shipments in square meter was down by 14% and revenue was down by 9.5%.
Now I would like to present to you our expectations of our Q1 2015 outlook. Owing to the slow seasonality and year-end maintenance need as well as fewer working days during the Chinese New Year, for large panels, we expect shipments to be down by high single digit to low teens percentage points QoQ.
On a product mix adjusted basis, blended ASP for large panels are expected to be roughly flat QoQ. For small and medium panels, as Q1 is the traditionally slow season, shipments are expected to be down by mid to high single digit percentage QoQ. Overall in Q1, loading rates will likely remain at similar levels to the previous quarter.
So this is our recap of Q4 results and expectations of our Q1 outlook. Next I would like to hand over the call to Paul who will provide you with our 2015 outlook.
Paul Peng
Ladies and gentlemen, good afternoon. Thank you for participating in our results conference call. As usual in the first quarter of every year, I'll talk about two things. Firstly, I will provide a recap of the past year and then I'll talk about our market outlook for 2015. And for the second part, I'll provide you with our strategy for the year coming ahead.
Firstly, in 2014, as you have heard, AUO tendered very strong results. Here I'd like to take this opportunity to express our gratitude for our investors.
We reported net profit for two years in a row and posted our best results since the 2008 financial crisis. Our net profit for the full year totaled TWD18b, up by fourfold from 2013. We posted an operating profit and net profit for seven quarters in a row and our debt was reduced by a total of TWD4 billion. During the past two and a half years, we have reduced debt by TWD110 billion and net debt to equity ratio is at a relatively low level.
Looking forward to 2015, the economic conditions will trend more favorable, with respect to stronger consumption amid lower oil prices. The panel industry is looking at a relatively healthy year ahead bolstered by strong demand for large size panels, which is boosted by a shift toward high resolution and TV replacement cycle, including the flat screen replacement cycle in developing markets in 2016 and 2017 and CRT TV and feature phone replacement cycle in emerging markets.
Overall Q1 will likely be the bottom of the year and our operating performance will improve sequentially in 2015. At CES this year, ICT products that featured high resolution, large size screens, curved technology and integrated touch functions were in the spotlight. Panel technology was what really made a difference. It is our belief that in 2015 overall panel supply and demand will be rather balanced and healthy.
In summary, AUO is committed to pursuing excellence and creating a virtuous cycle to create better performance.
Next I have a slide with me. I'd like to present to you AUO's strategy. In other words how we build a long-term profit model.
On top of the slide is our unique position. This means that AUO has a complete line up of fab capacity ranging from Gen3.5 to Gen8 fabs. This allows us to provide a full range of products from small to large sized panels. But more importantly, we are able to adjust our product mixes in fabs across the production lines efficiently.
Moreover, we are a neutral vendor. We are not in competition against any brand. We enjoy competitive advantages in terms of our technology and our products ranging from 4K and curved TV, integrated touch solutions, small and medium sized high resolution and amorphous based high resolution products.
We reported net profit for seven quarters in a row, further improving our financial structure. Our net debt to equity ratio also dropped considerably. Depreciation pressure will greatly reduce in the coming two years. This will also put us in a more advantageous position.
Also on the bottom of the slide are three blocks. The first block is smart investment. We hope we can have smarter investment. It has been our belief that we should create values by joining hands with our clients. Our customers have expectations for AUO adding new capacity production. This is why in 2016 we plan to add capacity by 25K to 30K sheets to our 8.5 Gen fab which will translate to a 5% increase to our capacity. The new capacity will go on line in 2016.
In light of the expansion in capacity, we will need new and more employees, so we have launched a new recruitment plan for an additional 1,500 employees in Taiwan.
We focus on profit share, not market share gains. What we want to stress is that AUO takes a very cautious approach towards capacity expansion decisions. We want to invest in added capacity at the right time. What we hope is to be able to create highly competitive high end products so that we can differentiate ourselves against our competitors. We hope to maximize the effect of improvements from technological investments and operational adjustments to further achieve profit share gains.
All these efforts and the plan for CapEx have been well thought out. Our CapEx in 2015 and 2016 will be around TWD30 billion including the investments for a long term fab in Kunshan and 8.5 Gen fab capacity expansion.
Compared with 2004 and 2010 when investment was at a very high level at AUO, our capital intensity in 2015 to 2016 will be roughly half of that. Moreover, D&A expenses for Gen7.5 and 8.5 also dropped gradually. So we estimate the depreciation expense will be smaller than TWD50 billion for 2015 and 2016.
The second block is right products. We want to have the right products. We truly believe that in the future you have to win in the market with technological advantages and a strong client base, not by how much capacity you have. This is why we place great priority on products with high cost performance ratios.
During the past two years, consumers have shifted from the pursuit of high end specs to products with high cost performance ratios. As a result we need to have flexible product development capability and this is really a strength of AUO, allowing us to adapt to market changes. AUO continues to focus on product and technological innovation. We want to provide products with high performance and cost efficiency based on clients' needs in different regions.
Let me illustrate with two examples. In the TV segment, we use curved and high color saturation and high dynamic range technology to provide the most advanced products. By doing so we are able to elevate the picture quality and efficiency of TVs and presenting a display experience truly close to that of OLED panels. And as a result, LCD panels that we produce can be equipped with a better and stronger cost advantage.
In the segment of notebook and tablet PC panels, we have oTP solutions which is on-cell touch panel solutions without cover lens so as to move the demand for mobile PC panels with affordable prices. AUO also has close partnerships with world leading brands which helps us to optimize our loading rate.
What we pursue is to provide most advanced technology and products to our clients and help them succeed in the market as well as elevate the value of their products. So by having product and technological innovation, we want to achieve win-win with our customers.
We also want to have partnerships with top tier world-leading clients to continuously optimize our client portfolio and to have a really steadily growing loading rate so as to maximize our profitability.
In the past year, with the rapid growth of Chinese smartphone brands, AUO also enjoyed a high growth rate. Currently Chinese smartphone makers -- five of Chinese smartphone makers are in the world's top 10 list. 50% of AUO's smartphone panels are shipped to Chinese smartphone makers.
At the end of last year, we successfully entered the supply chain of a renowned smartphone maker in China based in Southern China. And last year, we also successfully produced a high resolution smartphone panel using [indiscernible] technology. This year, the emerging market will continue to grow and this technology based on a-Si will continue to be a priority of AUO.
The last block is advanced technology. Technology is the foundation of our competitiveness and our sustainability. I would like to talk about two things. Firstly, we have a very strong technological foundation. We have a strong IT base. Currently patent wars have been waged around the world. We have a IP amount of more than 13,000. This gives a very good foundation to grow.
Moreover, as Chinese brands are aggressively expanding overseas, cell phones and TV brands are aggressively expanding as well. With our complete portfolio of patents, the overseas expansion of Chinese brands will provide us with a very good opportunity continuously to grow.
Secondly, we focus on technology and innovation. We focus on extending our new technology to different applications and products. UHD 4K will be applied to various applications this year ranging from TV, monitors, notebooks and cell phone panels.
We also hope that we will be able to focus on advancing our technology and to elevate the entry barrier for latecomers and continue to expand our lead over our peers so as to secure and strengthen our long-term profitability and growth. So that is our long-term profit model.
As the Chinese Lunar New Year is upon us, in the coming year, AUO hopes that we will continue to succeed in the new year. And we also would like to wish you happiness and prosperity in the Year of the Goat.
Question-and-Answer Session
A - Pearl Lin
Thank you Paul. Now we'd like to move into the Q&A session. As usual we have collected questions from analysts and we broke down the questions into three categories. The first category of questions is about market update and outlook. The first question is for our update in 2015 worldwide TV, monitor and notebook supply and demand. We have Michael to take the question.
Michael Tsai
Good afternoon everyone. I would like to provide you with an update on the 2015 TV, monitor, notebook and tablet supply and demand.
For TV in 2015 we expect that demand from emerging markets will be very strong, partly boosted by the replacement cycle of CRT TV sets. For developed markets, average TV panel size will continue to increase. We estimate that for the full year worldwide TV panel average size will likely increase by 1-inch and the overall growth of TV panels will likely grow by nearly 10%.
For the IT segment which includes monitors and notebook and tablet panels, as the effect from Windows XP replacement cycle continues to die down, IT product volume growth will likely be flat or down slightly. However, the panel sizes of monitors and tablets will continue to expand.
For smartphones, smartphones will continue to get bigger screens and higher resolutions. As the emerging market remains strong, growth momentum will be sustained. We estimate that the full year smartphone panels shipment, overall shipment will likely grow by more than 20%.
Overall in 2015, LCD panel area demand will likely grow by 6% to 8%. Moreover according to market researchers, in 2015 area supply will increase by 5% to 7%. As a result we are cautiously positive about the supply and demand this year. Thank you.
Pearl Lin
Thank you, Michael. The next question is regarding the inventory levels in major regions around the world. We still have Michael to take the question.
Michael Tsai
For TV, because vendors are stocking their inventory ahead of the Chinese New Year, so the inventory level there is slightly higher, which is around seven to nine weeks. But this is also in line with what is demanded for a high season.
As for other regions, the inventories of panels and end products are at normal levels which is six to eight weeks. As for IT, which includes monitor and notebook panels, again owing to inventory stocking ahead of the Chinese New Year, the inventory level is slightly higher. But for other regions, the levels are very healthy which is at four to five weeks.
Inventory levels at channels are actually quite normal as we have observed, which is a good sign because we think this reflects that people are getting more cautious towards inventory management. We believe this will be beneficial for the market and the industry as a whole.
Pearl Lin
Thank you, Michael. So that was the first category of questions. And the next category of questions is -- are financial related.
Analysts are interested in our loading rate. In Q4 our loading rate was roughly at 93%. And as we mentioned in the previous presentation, the loading rate will be roughly the same this year in Q1.
As for our components cost down, in Q4 the rate was at 2.2%. In Q1, the component cost down will likely be 2% to 2.5%.
As for our D&A, Paul has mentioned our D&A a little bit in the previous talk. In 2014, our D&A was less than TWD57 billion. In 2015 I think that amount will be nearer TWD50 billion.
As for 2016, that will be up to the timing of our -- our timing and our depreciation schedule. But we generally believe that D&A will be more than the level of 2015.
As for CapEx in 2015, some CapEx as mentioned from 2014 will be extended and pushed back into this year. As for the Kunshan plant we have already making payments for the equipments. And for the full year the CapEx will be around TWD40 billion.
The next question is regarding our Kunshan plant. Analysts are interested in the progress with our Gen6 LTPS plant. Currently the plan for that plant -- our plan for that plant remains the same. We hope to start mass production by the second half 2016. And most of the funding will come from syndicated loan and equity issuance to our investors. And the funding currently is very -- goes smoothly. So we retain our plan for mass production.
The next question is regarding our financing plan and cash dividend payout plan. For financing or capital raising plan, currently we do not have a specific plan because we need to look at our cash flow this year and the expenses needed to support future growth as well as a possible dilution to our equity.
As for our plan regarding dividend payout, actually we will take into consideration very similar factors. We need to think about our cash flow, our CapEx and most importantly the interest of our shareholders. With all things considered we will make a final plan. And currently we do not have -- yet we do not come to a final conclusion. When that happens, we will let you know.
Next there are questions regarding currency impact to the Company. As we have mentioned AUO's accounting currency is NTD. When the USD gained 1 percentage point, our margin improved by 0.5 percentage point. When the yen is weaker by 1 percentage point against NTD, our margin also improves by 1 percentage point.
As a whole, currency movements added 1.7 percentage points to our gross margin in Q4 last year.
So these questions were financial related. Now in our third category of questions which revolve around updates on AUO's key products and technologies, there are questions regarding TV panels because 4K2K's penetration rate is increasing. Analysts want to know how AUO maintain our tech lead and our product differentiation against peers. We'd like to have Michael to answer the questions.
Michael Tsai
Good afternoon. This is Michael. At CES products featuring 4K curved HDR and wide color gamut were in the spotlight. But actually AUO already has such products featuring these kind of technologies. We already mass produce these kind of products and have already developed such products.
In 2012, we already developed 4K2K panels and in 2013 we started to mass produce 4K2K panels. With 4K gaining popularity, we will focus on promoting new products featuring very high-end technologies including curved HDR and 4K technologies. That will help us to build up our differentiation capability in the high end TV segment.
For the curved TV segment, last year, international TV brands aggressively promoted their new products. Worldwide curved TV sales grew and exceeded 1 million units in 2014. This was far better than expectation. A lot of premier customers bought 4K plus curved TV sets in one go. Market researchers estimated that in 2015 curved TV panel shipments will likely reach more than 5 million units, up by about fivefold than last year -- than 2014.
This reflects that the growth momentum for curved panels is very strong.
We mentioned in the third quarter 2014 results conference call that we will launch the second generation 4K curved LTV panel with 4000 millimeter golden curvature. We already shipped such products to international brands.
We are able to combine the most highly-advanced LCD technologies including VA plus COA and copper manufacturing process to deliver the best products in the market. Currently, in the whole world, we are one of the only two companies that are able to provide such kind of products and mass produce them.
For 2015, we believe the curved TV market is really high potential but there is a very limited number of suppliers on the market. AUO will launch a full lineup of large-size TV panels that feature 4K and curved panels, including 50 and 55 and 65 inch 4K curved TV panels. So as to expand our opportunity in the high-end market. Our goal is to capture 30% of the 4K curved TV market.
Secondly, regarding HDR, high-dynamic range. Our strategy is to leverage HDR technology to further maximize the value of our 4K wide color gamut technologies. The ultimate goal is to bring up the value of and the picture quality of LCD panels and deliver a viewing experience similar to that of OLED panels.
What is HDR? It is a true to life display technology that is able to really enable representation of real-world scenes and the brightness that human eyes can see in the real world. This will allow LCD panels to give viewers more finer details whether in bright or dark environments.
HDR in fact is not a new thing but with transitions and advancements in the technology, AUO is able to apply HDR into LCD panels to provide a dynamic range similar to that of OLED at a more affordable cost.
AUO has very unique HDR technology that will be combined with the right type LED technology to deliver ultra-high dynamic range. In fact, we have a client that already adapt our 4K TV featuring HDR technology and this model won the best CES award this year.
Our first 4K TV featuring HDR was shipped to a client in North America and you may be able to see this product on the market already. This year, we expect to deliver this kind of product to other clients as well. And the product will go with the life-size 4K wide color gamut curved technology to continuously expand our lead over our competitors.
Pearl Lin
Thank you. The next question is regarding smartphones. Because starting from the second half of last year, the competition is -- became much more fierce in the smartphone market.
A lot of panel makers announced that they will launch new LTPS production lines. This also increased the market concerns over the impact on the industry supply and demand. We have F. C. to answer the question.
F.C. Hsiang
Good afternoon. This is F.C., regarding low-temp production, supply and demand, I think if you look at production capacity alone, what is normal is supply should be larger than demand. Btu production capacity is not the key here.
What's really important is how you deliver the technology that really meets the demand of your clients. Low-temp technology is really advanced, it requires very specific, very sophisticated manufacturing process. It takes a really long learning curve which usually lasts three to five years.
So when a newcomer adds new LTPS capacity, it doesn't mean that production capacity is efficient. So for 2015, we expect that full HD demand will grow significantly, moreover with smartphone panel sizes increasing, LTPS area demand will likely grow by more than 30%.
As for our market outlook, in 2015 we believe that smartphones will likely have an annual growth of 20%. China will remain the largest smartphone market around world. And the Chinese market will take up more than 30% of the worldwide smartphone market.
In terms of resolution requirements, the ratio of full HD will increase significantly and as for the demand for HD 720, will likely be strong. And such strong demand will be extended to emerging markets.
Moreover about our low-temp and amorphous production strategies. Our strategy basically is we want to grow with our customers. This year, cellphone panels have seen really fierce competition. AUO does not have a huge production capacity regarding -- for LTPS but we think the key is to secure orders from market-leading brands and to stabilize the loading rates for the whole year.
Currently Chinese smartphone brands, five of them already are in the top 10 list of the world. And their market share will likely grow to 35% to 40% from the previously 30% a year ago.
AUO has secured a strong foothold in the high-end mid-end market in China. Chinese clients now account for 50% -- more than 50% of our smartphone panels shipped. Our products can be seen in all the mainstream products of our clients.
In 2014, in the end of 2014, our 5.5 inch full HD panel was adopted by a smartphone maker in China which is based in the southern part of the country.
Moreover, with regard to amorphous, our strategy is to complement it with LTPS technology so as to provide best services to our customers. For low temp, we focus this technology on producing high-end, larger than 400ppi smartphone panels, including full HD and above resolution and in-cell touch smartphone panels. This year, we will likely pioneer in producing the world's first 4K ultra-high resolution smartphone panels.
As for amorphous, amorphous on full -- on HD 720's market share is ahead of the entire market. This year, we will have advancements in super narrow bezel technology. We will further reduce the border width to one millimeter, which will bring us ahead of other Taiwanese and Chinese vendors. In 2015, we will focus on expanding our reach in this technology at full steam in the emerging markets.
Pearl Lin
Thank you, F.C.. Our next question is regarding touch panel technologies. As embedded touch technology is one of the strengths of AUO, so there is a question regarding our products and progress with technological advancements. As well as the notebook with touch functions' penetration rate. We also have F.C. to take the question.
F.C. Hsiang
Because of the increasing demand for low-cost notebooks and commercial notebooks, touch notebooks' development has slowed down. Overall in 2014, notebook with touch panels' penetration rate was roughly 10% to 12%.
Two years ago AUO launched integrated touch solutions for notebooks for on-cell touch, or OTP. OTP embeds the touch functions sensing circuit into an LCD panel. We pioneered in producing OTP without cover lens. This helps eliminate the cause for a cover lens and lamination.
And also, reduced the complexity of supply chain management which further helped customers to drive down the cost of their finished products. Currently our OTP solutions already receive Windows 8 certification. In Q2, with customers producing new products, we will increase the production of our OTP solutions.
Previously, notebook with touch functions are very expensive because the costs are high. So notebook touch panels currently are limited to mid-to-high range models. With the mass production of OTP solutions, we will be able to meet the demand for inexpensive notebooks with touch panels.
Pearl Lin
There are also questions regarding our card display segment and our growth rate and updates with the -- for the market. We also have F.C. to answer the question.
F.C. Hsiang
In 2015, as the trend for smarter car is really taking foot, the market will be experiencing a double-digit growth. In 2014, AUO shipped -- AUO's car display shipment grew by 30%.
We secured our top-three position in [indiscernible] market. For 2015, our goal is to maintain a 30% and above high growth rate and further strengthening our foothold in the cluster segment.
Despite seasonality in Q1, we expect that car display shipments will remain very strong. And for the coming quarters, we will likely see sequential growth as well.
Our 12.3 inch cluster panel which has the highest resolution around the world has obtained the certification of our clients. We expect to mass produce this model by Q2. So we have made investments in super-large size and super-high -- ultra-high resolution cluster panels.
So we believe this year will likely still be a very good year for car displays at AUO. Thank you.
Operator
Our first question comes from the line of Sharon Shih of Morgan Stanley. Please go ahead .
Sharon Shih
Good afternoon everyone. I'm Sharon from Morgan Stanley. First of all, I would like to congratulate you on the stellar growth in 2014. It seems like 2015 will also be a very prosperous year for AUO.
I have two follow-up questions for your discussions about the 2015 outlook. Firstly, you mention the gen 8.5 new capacity. Could you elaborate when will you start to add the 25,000 to 30,000 additional capacity? When specific will the added capacity come into the mix of your production?
And the second question is regarding small and medium-sized panels. You have new offerings in the integrated touch panel solutions. Could you give us an idea about whether you will use low-temp technology to produce in-cell touch panels? And what is the shipment ratio of this kind of product?
Moreover, can you also give us an idea about your progress with wearable panels?
Michael Tsai
Hi, this is Michael. For your questions regarding our added capacity to the 8.5 gen fab in Houli. What we hope is that we will bring this added capacity into our production mix in the first half of 2016.
Sharon Shih
So for this fab in Houli, the added capacity will not really come online, there will be not a lot of contribution to your capacity?
Michael Tsai
Yes, that's correct. In 2015 we will have -- we will fill up the equipment and we will have a trial production and we expect to ramp up starting from 2016. And in mid-2016, the added capacity will come fully online.
F.C. Hsiang
Hi, this is F.C., I would like to provide feedback to your question regarding in-cell touch solutions. Currently for in-cell touch solutions, we mainly focus on smartphone panels. In the second half of this year, we will have mass production of LTPS-based full HD in-cell touch panels.
Currently, this model is being qualified by potential customers. And we are also developing in-cell touch panels using amorphous technology and this model is also being qualified.
We expect to mass produce in-cell touch panels for notebooks in Q2. As for wearables, we mainly focus on two segments. Firstly, LTPS application. We are aggressively planning for products using LTPS technology and we expect to introduce new products using this kind of technology in Q2 this year.
As for OLED wearable panels, which are mainly for watches, and actually we already mass produced OLED wearable panels in Q4 last year. Currently, in terms of market outlook, we think the demand is very strong.
This year, especially in the second half after the launch of Apple Watch, there will be more clients launching similar products and we believe AUO has a good strategy towards both LTPS and amorphous technologies and will be able to provide the products that our customers need.
Sharon Shih
Could I have a follow-up question? Your OLED panels for watches, do you have touch functions for it?
F.C. Hsiang
Actually we have this kind of option. But what we do is we accommodate our customers' needs and help them to customer our design.
Operator
Our next caller is Arthur Lai from Citigroup.
Arthur Lai
Good afternoon management team. Congratulations for giving a really impressive performance. I have a question regarding the strategies of TV brands around the world.
This year, Korean TV brands' demand for TV panels are really strong. From your point of view, from your observations about your clients in the region, do you see this trend to be sustained?
The second question is regarding curved TV panels and their strengths. When it comes to curved TV, two Korean brands have very different strategy. Is it because of the limitation of the technology that they adopt -- is it because that IPS is not efficient for producing curved panels?
Michael Tsai
I'll take the first question. Regarding the stronger demand from TV brands, I think various brands have their own strategies. But overall, most TV brands have a very consistent trend which is a shift towards larger panel sizes and higher-end respects.
As we mentioned, the penetration rate of 4K TVs will likely increase this year. I think not only Korean brands are aggressively placing orders for more panels. Other brands in other regions are also doing this.
The demand growth for TV panels will grow by 6% to 8% but the average -- the area growth will be 5% to 7%. So overall, supply will be more on the tight side.
I think the demand is very strong probably because the TV brands are making preparations ahead of the high season. I think this is something that most TV brands usually do.
Pearl Lin
Arthur, for your second question, do you -- is it -- do you want to know the strengths of IPS versus VA technology?
Arthur Lai
Yes. My question is why doesn't LG do curved technology?
Michael Tsai
This is Michael. We are not at liberty to comment on the strategy of our competitors. What we can say is that we hope to improve the performance of LCD panels to the level that is very similar to OLED.
With curve, we also want to pursue that goal. We adopt PSA which is a high-end VA technology. Using PSA, we are able to deliver a high picture quality, high color saturation and all of this can be realized in curved TV panels to deliver really fine details and high picture quality.
And this is also why PSA has its strength. PSA is able to deliver fine details because curved TV panels are very sensitive to details, to light. So using PSA, we can enjoy and advantage.
Arthur Lai
Do you mean compared with PSA, IPS is actually at a disadvantage?
Andy Yang
Arthur, this is Andy. We -- again, we are not commenting on the technology of our competitors. I think you -- what we do is, we leverage our technologies to develop applications in different areas. In -- with high-end TV, we focus on developing various products.
Our strategy's very clear, that is to use our LCD manufacturing capability to fulfil what people need in different areas. But we are doing this at a relatively more affordable price.
So our strategy is to really push up our LCD technology to really advance our technology. While at the same time ensuring we have cost advantage. So this has been our strategic goal for a long time.
As Michael just mentioned, this year, besides curved, we also leveraged HDR and wide color gamut technologies, so as to make our TV panels fulfil the demand of customers toward high-end TV sets. While at the same time helping them to enjoy cost advantages.
Pearl Lin
Ladies and gentlemen, in the interests of time, we will open the floor for two more questions.
Operator
Ladies and gentlemen in the interest of time we will open the floor for two more questions. Our next question comes from the line of Jerry Su from Credit Suisse, please go ahead.
Jerry Su
Good afternoon. This is Jerry, I have two questions. Firstly, about your Q4 gross margin. Andy, you mentioned that currency movements contributed to 1.7 percentage points increase to your gross margin. And you also mentioned you have contribution from material cost saving.
If we exclude ForEx movements and material cost saving, it looks like your gross margin will be down slightly from what you provided. Can you talk to -- can you give us an idea what are the negative contributions from?
Also, the second question is regarding 4K. You mentioned you have wide color gamut technology, can you give us an idea about the penetration rate of 4K panels this year and also what your targets are?
Andy Yang
For your first question, because we have year-end maintenance, so loading rate was affected slightly. As you know, when loading rate goes down, unit cost also goes down a little bit.
As we mentioned, the SP of notebook and tablet panels went down in Q4. So these are the negative impacts on our gross margin in Q4. As for the positive impacts, they came from core component cost and currency movements. And the cost structure and profitability increases with our TV panels. So our gross margin is up slightly.
Michael Tsai
Hi, this is Michael. Last year, the sell through of 4K TV sets was 9 million units in the whole world, with a penetration rate of roughly 4%. The sales volume -- the sales of 4K TVs will still concentrate on large size panels and high-end models, especially models that are larger than 50 inch, including 50 inch, 55 inch and 60 inch models.
This year, we project that sell through of 4K TV sets will likely be around 23 million to 25 million units. Previously, AUO focused on large size TV panels and this year what we will look for is to have 4K account for more than 30% of our 50 inch and above TV panel shipments.
Jerry Su
The number you mentioned, were they panels or sets? Do you have numbers for your panel targets?
Michael Tsai
The number that I mentioned, the 23 million to 25 million units, I think the shipment volume of panels will be larger than that. Overall, the penetration rate of 4K TV panels will be around 13% to 15%.
Operator
Our last caller is Jamie Yeh from Barclays Capital.
Jamie Yeh
Good afternoon. I have two questions. The first question is for Andy. You had an OP profit of NTD8.8 billion and net income of NTD6 billion. Seems like you were using a really high income tax rate which was 17%.
My question is whether you're going to use this income tax rate for 2015 as well?
The second question is regarding your Q1 outlook. Seems like your utilization rate will be flat compared to fourth quarter and your shipment will have a high single digit to low teens percentage drop.
That seems a little bit steep, especially compared to your Korean peer. Is it because you have a stronger TV panel shipment than notebook, what is why you will be able to maintain a relatively flat growth with ASP?
Andy Yang
With regard to your first question, you have to know that we reported our results on a consolidated basis. AUO has more than 50 subsidiaries, they are located across the world. They have various net profits and they are using different income tax rates. So it is very difficult for us to have a very simplified income tax rate to be presented in our Group financial results.
Because we still have net profit in Q4. And some of our subsidiaries conservatively estimate their income tax based on their earnings and the tax rate in the local region. Moreover, there was tax related to our merger between two subsidiaries, BriView and Forhouse.
As for the future, with regards to your question for the income tax rate, again it is very hard to have a simplified presentation of our income tax rate. Because every subsidiary in other countries have to follow the regulations of the local region.
Paul Peng
As for the second question -- this is Paul -- for your question regarding your Q1 outlook, what we provided in our guidance is a little bit steeper in the drop in shipment because in Q4 we have -- we had year-end maintenance. And that usually takes a long time.
We had maintenance in December and it affects -- it will affect our shipments in Q1 to some extent. Our efficient production capacity will still be in a high-loading rate. We -- what we seek is we will continue to have the best efficiency and to fulfil our clients' demands.
As for ASP, in the large-size panel segments, we have panels for TV, monitor and notebooks. When you calculate ASP, you do not just look at one single product, you have to look at your whole product mix.
Through product mix adjustments, we hope we can keep our blended ASP at a relatively stable level. Thank you.
Pearl Lin
Ladies and gentlemen, in the interests of time, this concludes our results conference call. If you still have any more questions, please feel free to contact us. Thank you. Goodbye.
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