Au Optronics' (AUO) CEO Paul Peng on Q2 2016 Results - Earnings Call Transcript

| About: AU Optronics (AUO)

AU Optronics Corp. (NYSE:AUO)

Q2 2016 Earnings Conference Call

July 27, 2016, 02:00 AM ET

Executives

Paul Peng - Chairman and Chief Executive Officer

Michael Tsai - President and Chief Operating Officer

Wei-Lung Liau - General Manager of Video Solutions Business Group

Sean Chen - General Manager of Mobile Solutions Business Group

Benjamin Tseng - Chief Financial Officer

Analysts

Sharon - Morgan Stanley

Jerry Su - Credit Suisse

Jerry Tsai - HSBC

Unidentified Company Representative

Ladies and gentlemen, good afternoon. This is [Julia Chou] (Ph) from AUO’s Investor Relations. On behalf of the company, I would like to welcome all of you to participate in our 2016 Second Quarter Results Conference Call.

Joining me here are five executives. Chairman and Chief Executive Officer, Mr. Paul Peng. President and Chief Operating Officer, Mr. Michael Tsai, General Manager of Video Solutions Business Group, Mr. Wei-Lung Liau, General Manager of Mobile Solutions Business Group, Mr. Sean Chen, and. Chief Financial Officer, Mr. Benjamin Tseng,.

The agenda of today call is as follows. Firstly, CEO will provide you with our Q2 results and our Q3 guidance and then our Chairman will give you our opening remark, then we’ll move into the Q&A session. We have collected questions from analysts. For the first part of the Q&A, our speakers will first address the questions, that we collected, if you still have questions, afterwards we’ll open the floor to take your questions.

Before I handover the microphone to Ben, I would like to first remind you that all forward-looking statements contain risks and uncertainties. Please take a minute to read the Safe Harbor notice on slide number 2. Now Benjamin, please.

Benjamin Tseng

Good afternoon. I would like to present to you our second quarter results. Going to strong demand for product including televisions, panel ASP bottomed out in the second quarter and started to pick up. Revenue came up by NT$9 billion to NT$80.1 billion, gross profit came in at NT$5.6 billion.

Operating profit was NT$100 million approximately. These indicators are improved significantly Q-o-Q and we also returned to profitability at the operating profit level. EBITDA margin came in at 25%, we also made an income tax expense of NT$506 of this amount, NT$230 was under distributed earnings tax. The rest represented the tax expenses, recognized by our subsidiaries based on the tax ratios in the countries where they operate.

Next slide balance sheet. In the second quarter, cash and cash equivalent came in at NT$73 billion, approximately equivalent to that of Q1. Long-term ratio term debt rose by NT$9 billion mainly only the payment for equipment to be installed in the Kunshan LTPS fab. Net debt to equity ratio rose slightly to 23.2%. Inventory went down by NT$3.4 billion Q-o-Q to NT$27.8 billion. Inventory turnover days also went down to a fiver quarter low at 36 days.

Next slide cash flow. We generated NT$7.6 billion from operating activities for Q2, CapEx was NT$16 billion. The first half of the year, the total CapEx was around NT$26.4 billion, we also generated NT$7.8 billion from financing activities.

Next slide, revenue breakdown by application. The share of TV went up to 46%, partly because of shipment growth and also because of the contribution increased from large in the 50inch panel shipment and also 4K models. Monitor and mobile PC, mobile device in commercial and other also saw both shipments and revenue contribution growth to various degree, therefore the shares of these applications has some changes.

Next slide, revenue breakdown by size. Larger there 50inch panels share went back to 30% which eco’s our comment on the growth in TV share in Q2 and at the year, we will continue to place a short focus on large size panels.

Next slide, shipments and ASP by area. In Q2 shipments in area went up by 22%, mainly because we had capacity from the 8.5 Gen fab in whole and the strong demands from customers. Market price bottomed out in the second quarter, but on a Q-o-Q basis, average quarterly market price still went down. Due to our product mix changes, ASP only went down by2.5%.

Next slide, our small and medium product. Shipments in area went up by 16.5%, due to static growth of card displays and this will displace then targeted price. Revenue for small and medium product rebounded by about 9.4%.

Now we like to provide you with our expectations for Q3. The market conditions became more favorable in the second quarter, Q3 will be the strong season, we believe the demand momentum will sustain. For large panels, we believe that shipments will be roughly flat Q-o-Q. On a product mix adjusted basis, blended ASP will be up by mid to high single-digit percentage point Q-o-Q.

As for small and medium products, shipments are expected to be down by double digits percentage points Q-o-Q, due to product mix changes. As for our loading rates, we believe the loading rates will be maintained at high levels. So that was my recap of the Q2 results and our guidance for Q3.

Now like to handover the call to Paul, who will provide you with our business outlook.

Paul Peng

Ladies and gentleman good afternoon. Thank you for participating in our results conference call, especially in such a hot day. This year the summer came especially earlier and the weather is particularly hot. The situation is rather similar to what we’re feeling in the panel industry, starting from the end of the first quarter. The demands for panels have picked up and we’re becoming more tighter for supply. Currently we’re seeing that other the products are experiencing short supply and very strong demand.

I took a path down memory lane and I found that the last time that we had such a strong demand and short supply was in 2007. When we had a lot of orders that we were able to fill all the orders. This year could be the hottest year, since 2007. We have some good news to report to you. In the second quarter, the market conditions became more favorable and our team spent great efforts in improving our business.

Our operating profit returned to the black and our inventory level went down to a five quarter low. In the first quarter, we already talked about that, panel industry will have better performance, quarter after quarter this year. Back then was said that, sales would bottom out in the first half of the year and the remaining quarters of the year, we’ll see conditions improving.

Right now, we believe that the market conditions are in line with our expectations previously, and this is some - I would like to show that some of our observations for the industry last year from the second half, ASP panels fluctuated violently it had a great impact on the profitability all panel makers and demand went down. Because we saw a great drop in the panel prices.

Branded vendors actually had more room to launch promotions. So they have been really aggressive, in their promotion activities. Let me give you some examples, 43inch televisions, no cost, no more than USD500 which was approximately at the same level as the 32inch television three or four years ago and the price of, 65inch televisions is similar to that of the smaller models two years ago. This means that consumers go attract by bigger televisions with best money.

This is why we saw a growth in demand in the first half. Vendors have been promoting their products really, aggressively. China, North America and Western Europe particular saw strong performance. The North America grew by 9% and China grew 13% in Q2. In Western Europe because of the Euro Cup demand went up by even 20%. This tells us that consumers are more willing to buy bigger television products but at a lower price. So they are getting bigger and bigger screens for TVs.

This intern boost the demand for the panels, at the same time, we’re seeing that the channels are digesting the inventories at a really efficient rate. The inventory levels right now are at very healthy levels. So that is the demand side, as for the supply side. Panel price fluctuations have big impact on the industry. Some panel makers have shut down their manufacturing facilities ranging from small generation to large generations fabs and they have already shifted their focus and their product lines.

Currently supply of small and medium size panels are tightening, because the large size panel area factoring bigger profits. On the other hand, these in the first quarter, in Taiwan we had a earth quake in the southern part of Taiwan and we have some competitors transitioning there manufacturing process. Panel makers in China are seeing that at demand for the entry level models drop and the prices has decline to a very low level. A lot of panel makers in China are no longer willing to produce model panels therefore they have shifted to larger screens and higher specification of product.

As a result, this has caused some impact on the supply yield and output. I think that will be panel supply is not as high as we imaging, because if you take all the factors that I talked about out, then it is very obvious that we are seeing some tight supplies, starting from the second quarter, third quarter will be the high season, but there are still some uncertainties were [indiscernible].

Even so we’re seeing that the end demand being rather stable and moving to a healthier performance. We believe that the high season is that in the second half, we’ll be worth observing but at the same time, we need to pay close attention to end source and the rate of digestion of inventory. AUO returned to the black and the second quarter at the operating level, because we have achieve some great achievements for a differentiate in our product and developing high-end products.

We continue to leverage our tech leadership and our differentiation abilities to meet the demand of our customers. So as we reduced the values of our product, as a result we’re able to boost our [UT] (Ph) rates at a faster pace than our peers. After we conducted the annual maintenance in Q4 and Q1, we have seen that our UT rates at a high level. We have been unable to fill all the orders. We believe that in Q3, loading rates will maintain at high levels, we will also, based on our trends to increase the ratio of our higher value added products and solutions.

We will focus more on long-term profitability and maximization of values for our customers. Some of our peers have come back to produce some entry level product so as to expand their supply, but the entry level would be these kind of product are not seeing the products that AUO will focus on. We hope and expect that the second half will be deteriorate that our business performance continue to increase and we will be able to tender better performance.

Benjamin Tseng

Thank you, Paul. Now, we would like to move into our Q&A session.

Question-and-Answer Session

Q - Unidentified Analyst

As usual we have collected questions from analysts and we broke down the questions into three groups. First, group of the question is market updates and outlook. Questions including in this group are updated on 2016, 2017 worldwide TV, monitor and notebook and tablet, supply and demand as toward TV sales through results and outlooks in major regions. And attrition there are questions relating to the inventory levels for TV sales, monitor and notebooks, smartphones. We have Michael to take these questions.

Michael Tsai

This is Michael. I would like to first provide our responses to the questions relating to 2016, 2017 worldwide TV, monitor and notebook and tablet supply and demand. Firstly on TV owing to the aggressive promotions by brand, and the boost from our sports events especially the Euro Cup. TV sales has reaching has been rather strong since on March. The screen size of TVs that consumer bought is also increasing, we said that worldwide average TV size will be up 1.522 inches. In recommend will likely would be up by more than 5%. On personal computers which include monitors, notebooks, and tablets.

In the second quarter, sales went up slightly to Q-o-Q. The performance was better than seasonal trend. Inventory levels at brand also continue to drop. Second half is the traditionally high season, although on a full-year basis the PC market will be down from last year, but there are already signs of recovery, it is expected that PC panel area demand will be down by about 2% year-over-year.

On smartphone in 2016, developed markets already are saturated. Shipment growth momentum is now shifted to emerging markets. With the new models being launched in the second half, we believe that the demand for large screen, high definition products will increase it is expected that worldwide full-year growth will be 6% and area growth will be in the double-digit range.

All in all, 2016 panel area demand will be up by 5% to 7%, which is in line with what we talked about last quarter and addition some of our peers are shutting down their capacities. Going into the second half we believe that supply demand will likely be more in the positive range.

As for the 2016 outlook, in light the capacity shutdown by strong competitors including Gen 5, Gen 4.5, Gen 7 and 8.5. It is expected that capacity wise area growth will be within 5%. These factors will likely bring the supply and demand to a more balance state, however we will have to look at the product mix plans for panel makers and the rate at which they will be able to bring new products, we believe that value added products and some new products that are going to be launched in 2017 will likely do as market demand, which will echo with the product strategy of a AUO.

On TV sell-through in major regions and also on the recent market, our changes firstly for the U.S. sell-through in the second quarter went up 8% year-over-year. So the market demand is really visible and strong. In Europe, owning to the Euro Cup and specific notes which in frank as well as the economy of improvement in east Europe. Second quarter's sell-through went up by 15%.

The impact of Brexit will have to be absorbed over the long-term, but for the short-term, we think that we will need to pay close attention to its impact on currency movement. However, UK market only accounts for 3% of the world markets, it will not have a big bearing on the world market.

Next on China, vendors are launching aggressive promotional activities on e-commerce platforms, sell-through in the second quarter went up by more than 13%, average size also grew by 2.6 inches from the same period last year. In the third quarter, there will be festival promotion including [indiscernible] and October 1st, golden weak promotion, as well as the fact that the sales are improving and growing in online platforms. We believe we can be quite optimistic about the demand in the second half, because these promotional activities will continue to boost demand.

As for emerging markets CRT replacement cycle is continuing in emerging Asia. We’re seeing strong performance from India and Indonesia. In the second quarter sales although went up by 9% year over year, as for Latin America, due to the decline of Brazil economy, sale in the second quarter, remain in the negative range. However, average size compared to last year grew by more than 2 inches.

All-in-all, worldwide TV sales grew in the second quarter has returned to the positive range, resting at 6%, this is a performance that we have been seeing for a long time. More importantly average size sold grew by 1.5 inches year-over-year.

Looking ahead to the second half, believe there are large screen televisions price already come to a sweet spot leaving a bigger room for branded vendors to sales and promote their product. So we can have really position expectations for a high season effect. This is in line with our efforts at a year over the past few years to focus on large screen, large side panels. In the future, we’ll continue to focus on large size products and technology development.

Next, I would like to talk about the update of the inventory levels for televisions, monitor, notebooks and smartphones. For televisions in China, channels have been promoting, televisions for a month, so they are taking a more flexible approach to inventory building. currently be inventory levels in China is seven to nine weeks, which is about one week carried in, but for other regions inventory levels for televisions are rather normal as six to eight weeks. As for monitors, inventory levels are lifting on three to four weeks which have been as relatively normal and healthy.

On notebooks, in the second quarter nature brands already having healthy inventory levels. inventory levels of some brands are four weeks higher than the normal levels. However, these levels are already closer to normal levels than what we observed and talked about in the conference call last quarter. All-in-all, demand is strong. The supply of all strengths of panel products are about to tighten up in the third quarter, so if you look at supply in the demand we believe that entering into the third quarter the industry will have a more healthy healthier development. Thank you.

Benjamin Tseng

Thank you, Michael. The next group of questions is relating to the initial conditions so I will take these questions myself as firstly on UT rates we believe in Q2 loading rates were at 90s and we believe that in Q3 loading rates will maintain at high levels as for component cost reductions. In the second quarter we had a 3% cost reduction. In Q3 the ratio will be about 2.5% as for D&A the first half in the first D&A amount was NT$19.8 billion for full year D&A amount will be at NT$14 billion. For 2017, we believe at the moment that the amount will be including NT$40 billion.

On CapEx the amount for 2016 will be including NT$45 billion to NT$50 billion as for 2017 CapEx it is still too early to talk about because we are still planning for it as for our low 10 Gen 6 fab in Kunshan, this fab will be able to produce 25K sheet per month. In the third quarter we will start production at this fab and we will enter mass production in the fourth quarter, we believe that in the second half of next year, we will be able to make all this capacity of this fab come online. the capacity of this fab will mainly be use to produce highly and high end products, including notebook panels and high definition touch smartphone panels.

Lastly on the currency fluctuation impact on the U.S. margins. In the second quarter NTD strengthen about 2% versus USD and weaken 3% to 3.9% versus Japanese yen. These changes were unfavorable to AUO, all-in-all, they had a 1.35% negative impact to our gross margin in the second quarter.

Operator

The last group of our question that we collected for analyst are relating to AU's key products and technologies. First question in this group is about our TV product updates including curve, [indiscernible] and 8K, we have Wei-Lung to take this questions.

Wei-Lung Liau

Good afternoon, this is Wei-Lung. I would like to talk about our TV product updates. In the first half, AUO’s high and differentiation product strategy will take you out of that advantage. Starting from March, we are seeing that our capacity - we are seeing nearly slow capacity, especially in the curved and bezel-less products. Bezel-less products we are seeing supply - we are seeing really stronger demand than supply.

Since the curve TV, 4K TV is seeing really strong demand especially in curve TV sell-through continue to reach new highs. In China brands are promoting their models really aggressively. And the May 1st period curve penetration in China has already reached 8%, now China has already outfit West Europe to become the largest market for curve TV.

More wide here in the five months of the year, Curve television cumulative sell-through reach 2.5 million units, that is the amount sold in the same period last year. So we have raised our execution for full year curve TV sell-through to 9 million units. We believe this will represent a year-over-year growth of 120%. In the 50 inch and above televisions curve penetration, we will also climb from the 10% to even high levels.

AUO is having a full lineup of curve television panel products, ranging from 43 inch to all the way to 85 inch product, currently as curve as our market share in the world wide curve television market is already more than 30%. We believe that the curve television panel shipment at a year will be tripling that of last year's. It appears that we will definitely reach the target that we set.

On Bezel-less AUO led the market to produce curved plus Bezel-less TV panels in the first quarter. We’ve seen strong demand from our customers and many end products are being launched, have been received good responses from customers. We believe that in the second half, shipment will improve sequentially, our goal is to bring Bezel-less of AUO to achieve 30% of the worldwide market share.

As for a 8-K, AUO strategies to have sustainable innovation, in terms of technology for development, so our next step is to launch the world’s semi first 8k plus, curved plus Bezel-less panels. These kind of product will be and in for opinion, client tell, so as to help AUO to build a higher entry level and technological barrier.

Operator

The next question is relating to our variable product. We have Sean to take this question.

Sean Chen

Good afternoon ladies and gentleman. AUOs all that capacity is particular suitable to produce low volume high variety products, especially variables and there are applications, compared to 2015, our OLED product has seen growth in both client numbers and the project, the number of projects that we’re engaging. We believe in Q3, the shipment volume will exceed a million units and we will continue to reach new heights.

Some of the updates for our key products, firstly on variables, which is a focus area of AUO, our variable products include 1.2 to 1.2.6 inch square full circular high definition and super narrow Bezel product. We also have a full line up products in different applications including sports, fitness and fashion accessory products.

Our products are really the top choice of our variables. VR is now have been in content in different kinds of area, including gambling, video education and online shopping, for VR you really need to have fast response time and high definition. Currently our OLED VR products. We already have 3.8 inch and 5.5 inch full HD screen OLED VR products in for our frequent 8 inch 4G products.

The resolution is already as high as 420 PPI which is leading the industry, this will help us to improve the picture quality of the displays, in light of the demand for our customers, for better products we’re currently aggressively developing VR OLED products with higher resolutions actually larger than 600 PPI. We hope that we can bring this product into mass production as soon as possible.

Operator

Now we have questions relating to car displays, we also have Sean to take this question.

Sean Chen

We believe the car displays demand is growing steadily and there are more applications coming up in 2016, global car display demand, car display growth will likely be more than 10% in 2016 purchase way growth will be 15% to 20% at AUO and our growth momentum will be larger than the market average. Currently the average size is increasing and the volume would also get larger continuously. At AUO, we are employing a dual strategies we want to achieve both shipment growth and also focusing more on car total solution development. So we want to have both growth in volume and growth in value.

AUO is one of the very few panel makers that can provide one-stop shopping for total solutions. Car displays especially have high demand for a technological capability and touch functionality also has high demand for technical strengths that is why AUO is providing fully integrated touch services, who help our customers to control quality. We also want to use our total solution to improve the contribution to revenues and improve our customers loyalty. Our goal is to climb the number one place in the worldwide market share.

Operator

Ladies and gentlemen we now open the floor for questions [Operator Instructions] Our first question comes from Sharon of Morgan Stanley.

Sharon

Good afternoon management team. This is Sharon from Morgan Stanley. Congratulations on the great results for the second quarter and the steadier outlook for the second half. I have two questions. First question do you have any plans for further optimizing your existing capacity? We are seeing that some of your peers are adjusting their capacity for their development in the next two to three years. Could you give us some color on your thoughts, do you have any plans to adjust your capacities ranging from 2016, 2017 and 2018 perhaps?

Secondly, the size migration momentum so far this year has been a positive surprise. Do you have any thoughts around size migration? Currently the world's average of sizes is 41 inch or so. We have seen that the [Indiscernible] of TV brands offering is 42 to 43 inch the next [Indiscernible] maybe 40 inch to 50 inch products is it possible that in the second half or next year that we will be seeing a larger extend of size migration for example a larger than 1.5 inch or even a growth of 2 inch.

Michael Tsai

Hi, this is Michael speaking. Thank you sharing for your encouragement. On your first question about our plan to optimize the existing capacity. I think you have this question because you thought some of the capacity shutdown plans by our peers. As I mentioned in the previous quarterly results call, we believe that the capacity of AUO although it may not be the largest but it is optimal. We have different generations of fabs.

Our focus is on optimizing our technologies, our products and it will also want to continue to improve the loading rate. We continue to expand our capacity at the same time, for example we had a new fab, a new 8.5 Gen fab last year, so what why we are doing this, we based on the market demand and customer's demand to optimize our technology.

I think I can probably highlight one thing, the new capacity in the future will be focusing on 8.6 and Gen 10, for these generations of production line, we believe AU all has those strong advantages. As for as size migration, we have been focusing on large size panels for very long time, including 43 inch or even in the future 65 and 75 inch or even bigger size panels. These will be our focus areas.

In terms of 65 inch panels we have been seeing growth in volumes but at the same time we are integrating multiple technology on to one product line. This will help us to basically optimize the capacity of the entire Gen 6 fab, this is why we have been more number one in terms of market share for 65 inch panels.

We will continue to leverage our technology to optimize our product mix, and including our Gen 7.5 and Gen 8 products, we will go for adding values instead of just on expanding our capacity, expanding the sizes of the panel that we produce. So if you want to talk about the competition on volumes or numbers we will rather focus more on the growth in value.

Sharon

Thank you.

Operator

Our next caller is Jerry Su from Credit Suisse. Please go ahead.

Jerry Su

I have a question for your P&L, you mentioned that in the first quarter you have non-control interest loss, could you explain where that loss come from? Which business line of your, because in this slide that showed us profitable, so where did you generate that loss?

Second question is relating to QLED, Korean and TV brands are expected to launch QLED products, could you talk about the differences between Quantum Dot and our LED versus QLED.

Third question you mentioned that, the shutdown of capacities of your peers, may have a negative impact on the total capacity. You said that you are loading rates are at mid 90, is it possible for you to expand their capacity and this that can have, as you are to make product mix of changes or if there anything that you can do to improve ASP?

Paul Peng

Jerry, hi this is Pan, I would like to take your first question on the non controlling interest in Q2. We saw an increase Q-o-Q mainly because for the Kunshan fab, before it went into mass production, we recognize fund loss. The fab in Kunshan, 49% of this fab is backed by external investors. So some of the expenses will be going into non-controlling this expense.

Wei-Lung Liau

Hi Jerry this is Wei-Lu and I would like to address your second question relating to QLED verses Quantum Dot. QLED and Quantum Dot are both methods to achieve white color gamut for televisions. For televisions especially high end televisions, consumers are asking for better picture qualities, as a result while color gamut will be a increasing new popular feature. On QLED and QD our ability white color gamut technologies for content dot usually we use Quantum Dot usually - manufactures use Quantum Dot films to achieve this technology and we already have some products last year.

When you put QD and to a film to make it a back line, you are able to achieve white color gamut. But Quantum Dot materials are pricier, it’s for Quantum Dot models to really increase in volume, unit price will be a key factor to observe. As far to LED it’s in corporate Quantum Dot materials into sales. It achieved white color gamut, but at the same time, it’s has better substance and new angles. But the technology is not that matured yet to achieve mass production. At the year, we continue to observe the development of this technology but right now it is not there yet, not there yet for mass production.

Michael Tsai

Hi Jerry this is Michal, I would like to take your third question. You talked about our high capacity, utilization rates and how much we expect that we can improve shipments and ASP. For a small or medium size panels, as you know we have Kunshan fab, which will enter into mass production this year, for small and medium size capacities we will have Gen 6 line to contribute to the projection, so there will be more obvious growth for the growth volume for the volume growth.

As for larger generation paths 26, 27.85 and 8.5 fabs. This year we start production at our 8.5 fab. And it is the capacity rate is already operating at a full capacity, so next year we believe that their contribution will be even higher we just went up in Q1 so the capacity of this fab will have contribution to our total capacity full year around next year.

That's for [Indiscernible] 8.5 fabs as these fabs we have been working brutally really hard in terms of the bottle making and IND. We want to further stream line and simplify our manufacturing process this will help us to increase our capacity using the existing capacity that we have. That's why the ASPs what we wanted to do is to leverage our product mix and also the value added technologies that we are developing including touch [Indiscernible] and gaming value added technologies to continue improve the FPs of our products.

When we focused on these two areas, we believe we will be able to meet the demand of the market and the customers. This is why we are able to maintain high levels of UT rates. What we wanted to do is to under the capacity that we have to continue booster demand with our technologies and our products so as to meet the demand of the customers that we have. Thank you.

Operator

Our next caller is Jerry Tsai from HSBC. Please go ahead.

Jerry Tsai

Good afternoon. This is Jerry from HSBC. First of all I would like to congratulate you for the stellar performance. I have three questions. Firstly, we are seeing the panel industry coming around but long-term wise the industries deal are rather volatile. So we really have to think about the risk that we may have going forward do you see that there is possibility for double booking for the second half, if you do or what how much is the possibility is there.

Second question, 32-inch models is the model that is growing having fast his pace at the moment, but when it was in the downturn the profitability of this model was really bad. If we are to expand the output of 32-inch models do you see that it will have a negative bearing on the supply and demand and the pricing of the products. Thirdly, panel prices in the third quarter are very likely to go up. Could you give us some color around your thoughts, what the pricing in the fourth quarter?

Michael Tsai

Hi, this is my Mike, I would like to take the first question. You talk about the demands for panels is inching up in the second quarter and it's whether there is a possibility for double booking. I think the reason why we are seeing strong demand is that firstly, the contribution by the European's Cup and the TV signal switch in France. Also international brands are promoting their new products in Europe which give the sale of their products.

In addition, in China the TV vendors are also promoting their products very aggressively, so international brands are having strong sales in Europe. And in China they are also seeing some growth in sales. Moreover starting from the second quarter all the way to the third quarter, China will be having some festival promotions.

In the second quarter we saw that sell-through was stronger than expected and in the U.S. sales was also very strong. Moreover, in the second quarter China work hard to digest their access inventory levels, currently inventory levels are rather normal and healthy. In preparation for the half season for the year-end how that days a lot of brands are stocking up on panels.

In addition, over the past two years, CRT televisions have achieve a accumulated to sales of more than a billion units. And in a past few years, LCD are smaller size LCD models replacement cycle also emerge. So customers are replacing their OCRT models and they are OLCD television for newer lines, as a result demand is rising.

As Paul mentioned the drop in prices has brought the small size panels to a switch bots. So the demand for large-size panels is improving significantly, this is in line with AU's expectations for the market. We expect that because of the demand for large-size panels and high-definition models, demand in the second half is relatively strong for television.

From what we are hearing from our customers and at the panel supply side, we believe that currently supply is on the short side. But we are not observing any double-booking phenomenon here, because panel makers have different plans for their production line. Right now we’re seeing that the premium products are having sure supplies for lower end product, sales are also rising, but we’re not seeing any double booking phenomenal at the movement.

Wei-Lung Liau

Jerry this is Wei-Lu I would like to address your question relating to the pricing of 32 inch models. Indeed we’ve seen many competitors are taking a different approach to the entry level 32 inch models, because the 32 inch models are seeing prices rising so they again, went back to produce more than 32 inch panels but different companies have different strategies. Some companies may not have good efficiency in terms of production, they do not have good yield in producing high end products or large sized panels.

So it is natural for them to migrate, back into producing 32 inch panels. But we need to pay close attention. Because if everyone goes back to producing a lot of 32 inch models, there may be some risk rising for oversupply. And we continue to focus on manufacturing our side panels but off course if our customers, have this demand for 32 inch panels, we’re able to flexibly adjust our capacity. But overall our strategy remains the same. We will focus on producing large size panels.

Michael Tsai

Jerry this is Michal, I would like to address your third question. relating to the panel prices going into the fourth quarter, basically the prices of panels depend on market supply and demand. So I think you can really look at the situation in the first two quarters, you have your own decision, your own judgment at AUO. We have been committed to using, value added technologies to bring our product mix to more optimal stage and to bringing ourselves to better profitability, so that is our goal, as for a prices, that will, we will have to leave it to the market to decide.

Operator

Thank you, ladies and gentleman and the increase of time, this concludes our results conference call. If you have any further questions, please feel free to contact us at AUO. Thank you.

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