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AU Optronics (AUO)

Q2 2007 Earnings Call

July 26, 2007 8:00 a.m. ET

Executives

Mr. Kuen-Yao Lee - Chairman, Chief Executive Officer and Member of Management Board

Mr. Hsuan Bin Chen - Vice-Chairman, President, Chief Operating Officer, Spokesperson and Member of Management Board

Mr. Max Weishun Cheng - Chief Financial Officer, Chief Accounting Officer, Controller and VP

Mr. Hui Hsiung - Executive VP of Bus. Units, Member of Management Board

Dr. Cheng-Yih Lin - Sr. VP and Member of Management Board

Analysts

Frank Wang – Morgan Stanley

J.J. Park – JP Morgan

TJ Mufe – Lehman Brothers

Andrew Abrams – Avian Securities

Tore Minusook – Moon Capital

Nick Teo – Macquarie Securities

Darice Liu – Maxim Group

Jeffrey Cotter – ABN Amro

Ngyen Carl – Lehman Brothers

Presentation

Operator

Ladies and gentlemen, and welcome to AU Optronics Corporation Second Quarter 2007 Results conference call. The conference call will be recorded and Webcast at the request of AU Optronics. Any objections, please hang up now. A copy of the presentation for AU Optronics’ Second Quarter 2007 results announcement can be found and downloaded at its Web site, auo.com, under Investors.

At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to Ms. Julie Chan, Senior Manager of Finance Division. Please proceed, ma’am.

Julie Chan

Thank you. Good morning and good evening to all participants. This is Julie Chan, Senior Finance Manager for AUO. On behalf of AUO, I would like to welcome everyone to our second quarter ’07 results conference call. Joined with me here, we have our Executive VP, Dr. Hui Hsiung; our President designate, Dr. L.J. Chan; Senior VP, General Manager for TV Consumer Products Display Business Group, Dr. David Su; our CFO, Mr. Max Cheng.

As always, we will spend the next one-hour or so to review our second quarter results, discuss some of the performance, highlight the trend of the industry, conclude our Q3 ’07 outlook. After that we will take your questions.

Before we begin, I would like to state that management comments about AUO’s current expectations made during this conference call are forward-looking statements subject to significant risks and uncertainties, and that actual results may differ materially from those contained in the forward-looking statements. So please do take a minute to read the disclaimer.

We would also like to bring your attention that AUO’s consolidated financial statements incorporated Taipei, CFI, and Taiwan, and will be a consolidated entity commencing the second quarter 2007.

And now, please do turn to slide number three of AUO’s presentation material.

We are pleased to report AUO’s second quarter performance is better than the company’s guidance. With the support of a better pricing environment, increasing demand from customers, AUO’s Q2 ’07 consolidated revenue improved 31.3% sequentially, reported at NT$106 billion, equivalent to US$3.2 billion.

In this quarter our large sized panel shipments increased 22% Q over Q, small and medium panel shipments increased 45.6%. With a combined effort of continued cost reduction on new model design (inaudible) in, production efficiency improvements and better loading grades, as well as the contribution of post-merger synergies, AUO achieved a quarter over quarter cost of goods sold reduction of 10.6% per square meter and a cash cost reduction of 8.6% per square meter in the quarter.

As a result, gross margin increased significantly to 11.4%. This also brings our OP margin to 6.5%, net margin to 5.6%, and EBITDA margin to 26.2%.

We reported our operating income as NT$6.9 billion, net income of NT$5.99 billion. Our basic EPS for the quarter was NT$0.79 per common share and US$0.24 per ADS.

Slide number four, on the balance sheet highlights, cash and short-term investments as of June 30th total NT$21.8 billion, slightly decreased from the previous quarter of NT$23.5 billion.

Inventory, in terms of absolute dollars, remains at the same level to Q1 at NT$44.7 billion. Total inventory turnover days reduced to 43 days from the previous quarter of 49 days.

During the quarter the company paid back NT$10.6 billion of debt and CB conversion. As a result, both short-term debt and long-term debt decreased by NT$0.5 billion and NT$10.2 billion respectively. AUO’s net debt to equity ratio also reduced to 77.3% from 83.1% in Q1.

Next slide. Slide number five, please. On the cash flow highlights, during the quarter operating cash inflow was NT$23.4 billion, mainly supported by net profit of NT$5.9 billion; depreciation, amortization of NT$20.8 billion offset slightly by a net change in working capital.

Net cash used in investing activities totaled NT$16.1 billion, mainly for the capital expenditure of NT$17.7 billion. Net financing activity of NT$9.2 billion was attributable mainly to the debt payment. As a result, AUO ended the quarter with a free cash flow of NT$5.7 billion and a net cash outflow of NT$1.9 billion.

Now let’s take a look at some of the business analysis. Slide number six, our revenue breakdown by product application during the quarter. TV sales had 43% Q over Q improvement, accounting for 39% of our second quarter revenue. Monitor had 26% Q over Q improvement; 30% of our total sales. Notebook (inaudible) were 19% of total sales. Other consumer electronics business, such as AV and mobile device, contributed 9%. The remaining 3% of the revenue was supported by general display.

Slide number seven, blended ASP per large-size panel shipment. During the quarter AUO shipped 19.5 million large-size panels, 20.2% Q over Q increase, which was much stronger than our guidance of the low teens percent. Blended ASP for TV was about US$301, a 1.2% Q over Q decline. Blended ASP for PC was up by 5%, return to US$110 during this quarter. And due to a product mix shift to more TV, blended ASP for the large-size panel was up by 6.7% Q over Q to US$151.

Slide number eight, please. By area, shipments per square meter experienced a 30.5% Q over Q growth while ASP per K square meter increased to US$1,325, a slight 1.2% Q over Q improvement.

Slide number nine. In this quarter we shipped 32.2 million units of small and medium panels. Revenue supported by this segment increased 27% to NT$8.3 billion.

Slide number ten. As for AUO’s monthly capacity planning for the September quarter, we plan to bring our L6B to 80K by September and bring our GEN 7.5 to a monthly 60K. If you are interested in more details, please do refer to our slide number ten.

Lastly, based on today’s business outlook, we do expect our Q3 ’07 outlook to be for the large-panel shipment to increase by high single digit percentage Q over Q. Breakdown between PC and TV; for PC we expect panel shipments to increase by mid-single digit percentage Q over Q. For the TV panel shipments, we expect it to increase by high teens percentage. For the small and medium panel shipments, we expect to increase by about 20%.

As for pricing, while pricing expects to be more stable during Q3, blended ASP for PC expects to improve by high single digit percentage, partially due to a product mix change. And as for TV, we do expect it to improve by mid single digit percentage, which is mainly due to a product mix shift. Lastly, we do expect our overall loading rate to be close to full, that is at high 90%.

This shall end my presentation. We will use the remaining time to take your questions. Operator, please open the floor for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Frank Wang with Morgan Stanley. Please proceed.

Frank Wang – Morgan Stanley

Thank you. Good evening. Just some housekeeping items, please. The first question is can you talk about your shipment mix by applications, TV, monitors, notebook, and general display in the second quarter, and what do you expect that mix to be in the third quarter?

Julie Chan

Frank, we have been practicing to give it by revenue. If it is by unit, we are reluctant to do so. So I think you have to just stick to the breakdown by revenue. Thank you.

Frank Wang – Morgan Stanley

I guess an easy one. Can you talk about the depreciation for 2007 and 2008?

(Unknown Company Representative)

The depreciation for 2007 would be at about NT$82 billion and a quite similar amount for ’08.

Frank Wang – Morgan Stanley

And for monitoring purposes, can you talk about what we should be expecting for non-operating items and the tax rate going to third quarter and the fourth quarter?

(Unknown Company Representative)

We have about NT$1.2 billion for interest expenses in Q2 this year. For those other non-operating expenses, there is a gain, a foreign exchange gain, it’s about NT$0.3 billion. So the total net operating expenses would be about NT$0.85 billion.

Frank Wang – Morgan Stanley

And do you expect that to be quite similar in the third quarter and fourth quarter?

(Unknown Company Representative)

For the interest and expenses it would continue to be about NT$1.2 billion to NT$1.3 billion. That’s the number, I guess would get applied to Q3 and Q4.

Frank Wang – Morgan Stanley

And how about tax rates?

(Unknown Company Representative)

Okay. I’m sorry. Tax rate, I guess it would be about 10% of our taxable income, I should say income before tax. So our applicable tax rate would be about 10%.

Frank Wang – Morgan Stanley

My last question, just for clarification, last quarter you gave a guidance for second quarter loading rate was 95%. But I think you mentioned the second quarter loading rate was 92%, but the shipment actually increased. The second quarter shipment was higher than what you guided for about a quarter ago. Can you just explain the difference?

(Unknown Company Representative)

That’s also contributed by our inventory on Q1, so that helped us a little bit to compensate the loading rate in Q2. Yes, the loading rate actually was about 92% only, because in April the loading rate just stayed quite low, so that caused the overall loading rate in Q2 to 92% only.

Frank Wang – Morgan Stanley

Thank you very much.

Operator

Your next question comes from the line of J.J. Park with JP Morgan. Please proceed.

J.J. Park – JP Morgan

Thank you for the presentation. Just looking at your guidance in the PC and the TV, you guide the 5% growth for the PC in the high teen, but as far as I know your margin of IT panel seems to be higher than the TV. Why don’t you increase PC panel or handle the issue of different demand instead of increasing the TV?

Hui Hsiung

This is Hui Hsiung answering your question. I think that our Q3 capacity expansion primarily is in Gen-7.5, as well as Gen-6, so a majority of our new capacity actually is for TV production.

Furthermore, I think even before we started the first quarter, actually they already come into the customers, so we don’t change our commitment (inaudible), some difference in the profitability. That has been our pretty consistent policy throughout the years, so we still follow the same policy.

J.J. Park – JP Morgan

Just for clarification, look at your competitors, they also expanded current capacity, such as Gen-5 and the Gen-6. I’m just looking at your capacity by fab, there isn’t that much growth in the existing line besides Gen-7.5. Is there any chance that you can expand or increase production output in the existing line, besides 7.5 in July?

L.J. Chan

This is L.J. I think that we continue to improve the efficiency of the old generation fab that’s called Gen-5 or Gen-6. That means we push the improvement under equipment efficiency, OEE. That’s adjusted (inaudible), so you can improve the efficiency.

J.J. Park – JP Morgan

So is it safe to assume that your production output might be higher, even in the existing Gen-5 and Gen-6?

L.J. Chan

Yes.

J.J. Park – JP Morgan

Okay. Thank you very much.

Operator

Your next question comes from the line of TJ Mufe with Lehman Brothers. Please proceed.

TJ Mufe – Lehman Brothers

Good evening. A couple of quick questions on my end. First, on the capacity front, can you give us a first look at what cap ex would look like for 2008? And within that, if you could tell us where you see L78 capacity going in ’08, what the total potential capacity is there, and then what your expectations and timing for L7B?

Max Cheng

This is Max Cheng. For the cap ex in the year 2008, at this moment we guess it would be about NT$70 billion. This mainly for another set in Generation 7.5 and also some expansion of our existing Gen-6 line, so there will be about NT$70 billion.

For next generation, at this moment, we still do not have any final decision yet. It might take a longer time to make this decision.

TJ Mufe – Lehman Brothers

In terms of L7A, what’s the total potential capacity there?

Max Chen

L7A, that will be 75 to 78K amount. That’s the final capacity.

TJ Mufe – Lehman Brothers

Moving over to your TV business, can you talk about, customer mix-wise, whether you’re seeing any change in terms of your mix in tier one brands versus tier two? Secondly, can you talk a little bit about the mix in terms of unit sizes that you’re seeing, that you saw in Q2 and what you’re expecting in Q3 and Q4? Thank you.

David Su

This is David. To answer your question, regarding our customer mix, we created this data the same compared with Q2 and Q3. Again, I mentioned in the last conference, it’s our top ten brand name occupies about 75% to 80% of our volume, so this number will remain pretty much the same in Q3 as Q2.

In terms of the product mix, because our Gen-7.5 is keeping ramping up and some, in terms of product mix we have increased in this larger sized area that is for a 40 inch, 42 inch, and 46 inch. So, if I break out into a smaller sized category for (inaudible) the 10X inch range. That means it’s sized below 20 inch. In Q2, it’s about 7%, but in Q3, it has dropped to around 6%. For sizes around 2X inch, it’s about 30%, but move to Q3 we reduced to 26%, but we increase for larger size, like 30X inch. Our (inaudible) in Q2 and Q3 almost stayed the same. It’s about 53% here. For 40X inch, for Q2 it’s about 10%, but Q3, we increased to 15%.

The other point I would like to mention to you is in this 30 inch category, even though Q2 and Q3, the ratio stayed at about 53%, but the mix between 32 and 37, they have some change. Between Q2 and Q3 we are going to deliver more percentage-wise in 37, have an increased percentage here to this particular sized area, and 32 we’re (inaudible) a little bit percentage there. That means for larger sizes, like a 37, 40, 42, and 46, in Q3 the percentage will increase compared with Q2.

TJ Mufe – Lehman Brothers

That’s very helpful. Thank you.

Operator

Your next question comes from the line of Andrew Abrams with Avian Securities. Please proceed.

Andrew Abrams – Avian Securities

I was wondering if you talk a little bit about what you’re seeing in terms of inventories, not necessarily your inventories, but what you’re seeing in the OEM channel, especially with your top ten customers. At what stage are we at with inventories toward the build for the holiday season and where you guys are looking for the next 90 days or so?

Dr. Hui Hsiung

This is Hui Hsiung. I think, in general, other than notebook panels, I think both TV and monitor panels, the OEM in the channels are higher inventory compared to Q1, of course. However, in general, those are not very high numbers, at most two weeks is about normal, mostly around one to two weeks is about normal. So it’s a very manageable inventory level.

Earlier, maybe a month ago, there appeared to be higher inventory in the TV 40 plus inch range, but recently, the sale through is improving, so that is getting better as well. So, by and large, I think that building up inventory is what is intentioned during the Q2 period. For a simple reason, I think Q3 we still have a high single digit percentage in terms of shortage between supply and demand. So that bit of inventory will easily be digested during Q3.

Andrew Abrams – Avian Securities

Thank you. I was wondering if you could talk, just on a general basis, about your average panel size and what that’s done first quarter, second quarter, and where you expect that to be third quarter on a square meter basis.

Dr. Hui Hsiung

The numbers, yes. In terms of panel breakdown, I think that earlier David Su gave you the TV, but I can give you a rough idea about the monitor as well. The monitor moving towards 20 plus inch category, so in Q2 it was 21%, 20 inch are a lot higher, but in Q3, this will be 26%, so about 5% increase for the larger—

Andrew Abrams – Avian Securities

That’s the wide product.

Dr. Hui Hsiung

The wide product is actually even more, because the wide product includes 19 inch as well. The wide product, Q2 was 41% and Q3 will be 47%.

Andrew Abrams – Avian Securities

Just back to cap ex for a minute, you were talking about the L7A expansion. Are you considering, or is it a done deal on a L7D or L7A second line, or is that just going to be L7B at some later date?

Dr. Hui Hsiung

The L7A, L.J. mentioned that in September, we’re pretty much done with it. I’m sorry. Actually, L7A, this year is 60K, but next year we’ll increase to close to 78K to 80K. That is about the maximum for L7A, but anything beyond 60K will be next year.

For L7B, the building is already ready, so the installation will begin late next year. Our first phase will be 40K, but that has room for a second phase. The second phase, the maximum for L7B will be 100K roughly. We have not decided the exact timing yet. The 40K first phase for L7B is pretty much decided, so we have funding allocated for that.

Andrew Abrams – Avian Securities

That’s in your cap ex budget for the ’08 year?

Dr. Hui Hsiung

That’s correct, yes, partially. Because of the moving, it will be late ’08, so some of the (inaudible) are already coming in for L7C.

Andrew Abrams – Avian Securities

The L7B 40K line, would that be up and running by mid-year next year, is that going to be an operational line for the third quarter build?

Dr. Hui Hsiung

Yes, it will be in the middle of 2009.

Andrew Abrams – Avian Securities

Okay, ’09.

Dr. Hui Hsiung

The installation starts late next year, but mass production usually takes six months to do that.

Andrew Abrams – Avian Securities

Okay, so we’re scheduled for ’09 on that first L7B line and then after that.

Dr. Hui Hsiung

That’s correct.

Andrew Abrams – Avian Securities

Thank you very much.

Operator

(Operator instructions) At this time, there are no further questions. I’m sorry, we do have a question that just queued up from the line of Tore Minusook with Moon Capital. Please proceed.

Tore Minusook – Moon Capital

Hello. Congratulations with your great result. Can you comment a little bit about your cost decline? Obviously, you did a really good job in Q2. Can you comment on the compensation of cost decline in Q2, where it came from, and also your view on your cost decline going forward in Q3 and Q4? Thank you.

Dr. Hui Hsiung

From Q1 to Q2 our loading rate increased from about 81% to 92%, so that is a major contribution to the cost down. Another contribution of the cost down is actually a combination of – during this period we were facing quite a high percentage of cost-down models. Those are new models with lower material cost, so that also contributes greatly to the Q2 improvement.

Further is of course the ASP improvement. But during the same period, the factory efficiency also improved. During Q1 we still have not finished the integration between – for the mergers since last year, the integration between Quanta Display and AUO. This position that we did made some major changes in the production lines and processes, so that we did not complete in Q1; that is completed in Q2. So that is also accounting for some cost reduction due to the better efficiency. So a number of factors contributed to the improvement of bottom line during Q2.

Looking into Q3, we have some further increase in loading. I think, as Julie mentioned earlier, we guide in Q3, pretty much we can fully load. There’s always some inefficiency, but very close to 100%, high 90% of the loading. So that will contribute to the additional cost down. In the past we usually manage 3% to 5% of other costs, material and other factory efficiencies, so that’s a rough range for the Q3 as well.

Tore Minusook – Moon Capital

So – sorry – 3 to 5 just from the materials, and then you have loading on top of that? Or 3 to 5 for –

Dr. Hui Hsiung

Loading is separate. The 3 to 5 is the material plus factory improvement.

Julie Chen

But Tore, that 3 to 5, when it converts to AUO total cost, because our variable cost – you know how much it represent our variable cost. So would mean for the total cost, it will be just represent very low single digits, okay?

Tore Minusook – Moon Capital

Got you. Lastly, in terms of the QDI fabs, are they pretty much up and running at the level of AUO’s standard now in terms of profitability and customer qualification and whatnot?

Dr. Hui Hsiung

I wouldn’t say it’s 100%, but it’s close. Certainly there’s still room for improvement.

Tore Minusook – Moon Capital

Okay, great. Thank you.

Operator

Your next question comes from the line of Nick Teo with Macquarie. Please proceed.

Nick Teo – Macquarie Securities

Good evening. Congratulations again on the good results. I have two questions. The first question is about small-panel capacity. It looks like your small and medium-sized panel business is growing very strongly, and I’m wondering if maybe next year you might have to allocate more capacity, either by using some of the 5G lines or maybe the 4G fabs to support the small-sized businesses.

My second question is about employee stock bonus. I’m just wondering if there’s been any discussions regarding a policy or specific target regarding employee bonus shares. Thank you.

(Unidentified Company Representative

For the first question, you are right. Our medium/small-sized business is pretty robust, and also looking into next year we expect another high-growth year for medium/small-sized. So we do have plan to expand utility of the 3.5 and even Gen 4 capacity for the medium/small size. Right now, Gen 4 is still primary, is the large size, and Gen 3.5 still some percentage for like Notebook or general display kind of applications. And that almost will totally dedicated for Gen 3 for medium/small-sized – I mean, Gen 3.5. But also we will allocate a substantial capacity of Gen 4 to 3.5.

Certainly that means we will move the Notebook production mostly to Gen 5, and some of the desktop monitor have passed to Gen 6, in particular 20-inch or higher, will utilize more Gen 6 for monitor. So this will be up-shifted.

Max Cheng

This is Max Cheng. I’ll try to answer your second question about employee bonus. I still haven’t finalized the number yet. We did have some discussion with the barrister of the vote. Yes, the percentage-wise, we might be between 10% to 15%, but at this moment, we have to say we got to benchmark some other IT company in Taiwan to make sure. We should give employee a right and fair number, but that could be between 10 to 15%. That’s our forecast at this moment.

Nick Teo – Macquarie Securities

Okay, that’s great, thank you very much. And maybe just a clarification regarding the small-panel capacity: This shift that you’re talking about will take place next year?

Dr. David Su

Yes, this is David. To answer your question: Concern over the product shift and the capacity shift is, our current demand from our customers, certainly the medium-size panels is increasing, and smaller-size panel also is increasing. So the shift from Gen 3.5 to Gen 4, actually what we do is, we are moving the medium-size from 3.5 to Gen 4, so that extra capacity in Gen 3.5, we can reserve for smaller size. And as (inaudible) mentioned, the Notebook used to stay in Gen 4, move to Gen 5, and that capacity can convert it for medium-size panel for our customers. Actually, part of the Gen 4 capacity now is already dedicated for medium size already, and for next year, that portion will get bigger for next year.

Nick Teo – Macquarie Securities

Okay, that’s great. Thank you very much.

Operator

Your next question comes from the line of Darice Liu with Maxim Group. Please proceed.

Darice Liu – Maxim Group

Good evening. With the current strong demand picture, as we head into the second half of ’07, have you seen any tightness in the (inaudible) for any particular components?

L.J. Chan

No. This is L.J. We don’t see any shortage on the components. That’s current status.

Darice Liu – Maxim Group

Okay. And then – because last quarter you had mentioned that there might be some tightness in glass and some other components. You’re not seeing that right now?

Unidentified Company Representative

Kind of tight, but not shortage for the glass at this moment. Yes, from time to time we might suffer this kind of a problem – I mean, the component shortage. But for this quarter, I guess it’s still manageable condition.

Darice Liu – Maxim Group

And then do you have any visibility in terms of the 4Q supply?

Unidentified Company Representative

Right now, we don’t have any item particularly alerting the capacity that potentially may limit our (inaudible) utility. So far, not. From time to time there are some individual items, but usually those are very short-term.

Darice Liu – Maxim Group

Okay, fair enough. Then, just a housekeeping question: You mentioned that next year’s cap ex looks to be about NT$70 billion. Can you remind us what this year’s cap ex is, and if there’s any changes to it?

Max Cheng

No, we are not going to change the number for this year. The number will be the NT$90 billion to NT$95 billion.

Darice Liu – Maxim Group

Okay, thank you.

Operator

Your next question comes from the line of Jeffrey Cotter with ABN. Please proceed.

Jeffrey Cotter – ABN Amro

Good evening. I have two questions, actually. One: If you could just clarify on 7V, I think in the conference this afternoon you indicated that you would be 40K in 2008. But I think in this conference you just said that that capacity will come on in 2009. Can you just confirm the timing?

Unidentified Company Representative

Yes. I think that the L7B, we will start to move in the equipment in 2008. So actually, the capacity will come up, so for mass production will be the middle of 2009.

Jeffrey Cotter – ABN Amro

Okay. So most of the incremental capacity in 2009, according to your current plan, should come from L7B; is that correct?

Unidentified Company Representative

Yes, L7B. And I think, as I mentioned, that we will continue to improve the efficiency of the current phase, so –

Jeffrey Cotter – ABN Amro

Right, and for your 5G facilities, I calculate you have a combined capacity in the four fabs of about 310,000 wafers per month. What do you think the maximum capacity that you would be able to drive those fabs to?

Unidentified Company Representative

In terms of the space, we still have the room to improve the capacity in our – we call that L5B – that still have that (inaudible) that’s 20 to 30K of capacity room.

Jeffrey Cotter – ABN Amro

Okay. Is there any room for additional capacity in any of the other fabs?

Unidentified Company Representative

Yes. As I mentioned, we will push out capacity. That’s due to the improvement of the efficiency.

Jeffrey Cotter – ABN Amro

Right, okay. And for L5B, would adding 20 to 30K be part of your 2008 cap ex budget?

Julie Chen

No. Jeff, similarly, in this afternoon’s session, we did say that for the Reynolds Plan, we do plan perhaps for L7A to increase to in the neighborhood of between 75K to 78K, and then we are – L7B, that is possible move up to 130K, and that’s set for ’08.

Jeffrey Cotter – ABN Amro

No, L6B goes to 120. L6B goes up to 120, right?

Unidentified Company Representative

Yes, 6B has room to up to 120, yes.

Jeffrey Cotter – ABN Amro

So 6B goes to 120, 7A is 75K to 78K and that’s what your cap ex at NT$70 billion is budgeted toward currently?

Unidentified Company Representative

That’s the major part of the capacity. However, as L.J. mentioned, we’re still doing incremental, we still have machines such that we can incrementally add capacity to existing fabs. So all the (inaudible), we still have some incremental increase during next year. So that’s how we expect to reach 20% area increase for next year. So for 7A and 6B, that will not reach 20%. But the additional capacity will be added by a relatively smaller investment just to optimize the lines, line balance kind of improvements.

Jeffrey Cotter – ABN Amro

Guys, that’s great. I can calculate off of that. That’s excellent.

On your next generation, I think in previous meetings you talked about the potential for skipping 8G and then moving into maybe a 9G or 10G. If you were to do that, when do you think the soonest, the next post-8G technology might be ready?

Unidentified Company Representative

2010 is the earliest. Yes.

Jeffrey Cotter – ABN Amro

That’s excellent. Thanks very much.

Operator

Your next question comes from the line of Ngyen Carl with Lehman Brothers. Please proceed.

Ngyen Carl – Lehman Brothers

Just a quick question on the small/medium load, just a follow up of a previous question. What’s the percentage now allocated for the production of small/medium (inaudible) in the 3.5 gen and the 4 gen?

David Su

I don’t have the exact number, but that was a big portion of the 3.5 generation. Actually, it was dedicated for medium/smaller size and I would say it’s around 18% range. The rest of the 20% entries are taken by the Notebook and some general display. But like I explained before, they are moving out more to Gen 4, so that left capacity were used by smaller-sized panels.

Ngyen Carl – Lehman Brothers

Is that including LNTPS technology (inaudible)?

David Su

That’s included.

Ngyen Carl – Lehman Brothers

Okay. Next question, to Max, what is the inventory base for the finished goods now in second quarter?

Max Cheng

About 2-3 weeks. But for us, you know, some of the inventory are, even that are coming (inaudible) there has been slow to our customers. But because the shipment turn, that was put into, we couldn’t cut back our sales for this month.

Unidentified Company Representative

Also include the (inaudible) and also material in transition, in transit between here and Europe. Part of that is actually the last couple of days shipment that didn’t come in this quarter.

Ngyen Carl – Lehman Brothers

Can you say the in transit shipment to be about one week?

Unidentified Company Representative

Yes, about one week.

Ngyen Carl – Lehman Brothers

Thank you.

Operator

Your next question comes from the line of Andrew Abrams with Avian Securities. Please proceed.

Andrew Abrams – Avian Securities

If you could give us a little help on understanding what you need to do in order to take a line, a 30K line and make it a 35K line by squeezing out more efficiency in the line. You mentioned that some equipment would be added. Maybe you could kind of help us understand what type of equipment you’re talking about or are these just increasing tack times and things like that, if you could give a little detail there.

L.J. Chan

This is L.J. speaking. Typically what we would do (inaudible) that’s improve the efficiency, improve the tack times. That’s first. Second, in general we will check the (inaudible) that’s purchased, add (inaudible) to do the (inaudible). So this leads to a (inaudible) that will improve the capacity eventually.

In general it depends on the process, it depends on the part, it also depends on the (inaudible). But in general, that’s (inaudible).

Andrew Abrams – Avian Securities

Thank you.

Operator

(Operator instructions) At this time there are no further questions. I would now like to turn the call back over to Ms. Julie Chen for closing remarks.

Julie Chen

Thank you very much for your support and participation at AUO’s earning call. Should you have any questions, please write to us at IR@auo.com. Thank you very much for your support. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: AU Optronics Q2 2007 Earnings Call Transcript
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