Here’s the entire text of the prepared remarks from AU Optronics’ (ticker: AUO) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Julie Chen, Senior Manager of Finance
HB Chen, President and COO
Hui Hsiung, Executive VP
Max Cheng, CFO and VP
CJ Muse, Lehman Brothers, Analyst
Hash, Peterman, Analyst
Matthew Smith, CIBC, Analyst
Ivan Gull, Analyst
Frank Yuan, Morgan Stanley, Analyst
Nick Teal, Macquarie Security, Analyst
Chung Ho Ong, SG Asset Management, Analyst
Ash Fish, Tigermann, Analyst
Helen Hope, Goldman Sachs - Analyst
Good day Ladies and Gentlemen and welcome to AU Optropnics Corporation Third Quarter 2005 Results Conference Call. The Conference Call will be recorded and webcasted at the request of AUO, any objections please hang up now. A copy of the presentation for AUO third quarter 2005 results announcement can be found and downloaded from its website at www.auo.com under Investors.
I would now like to turn the presentation over to your host of today's call, Miss Julie Chen. You may go ahead, ma'am.
Julie Chen, Senior Manager of Finance
Thank you. Good morning and good evening to all participants. This is Julie Chen, Senior Manager of Finance for AUO. Joined with me here we have Mr. HB Chen, our President and COO, Dr. Hui Hsiung, the Executive VP, Mr. Max Cheng, the CFO and VP, Dr. David Su, VP, and Miss Grace Wu, the Senior Manager of AUO.
We will spend the first part of today's conference call reviewing our prepared remarks which correspond to the slides available on our website. Following this, we will open the floor to take your questions.
Now, before we begin, I would like to say 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.
The financial statements we are discussing today have been prepared on a consolidated basis in accordance with accounting principles generally accepted in Taiwan, the IOC GAAP. You should be cautioned that these accounting principles differ in many respects from the U.S. GAAP.
Information as to those sectors that could cause actual results to differ materially from AUO's forward looking statements may be found in AUO's Annual Report on Form 20F, filed with the United States Securities and Exchange Commission with respect to the year ended December 31 2004, and such other documents as may be filed with AUO or submitted to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward looking statements whether as a result of new information due to an event or otherwise.
Now, during the past three consecutive months of strong unit shipments, AUO has delivered again record high revenue for the third quarter of 2005. If I may ask you to turn to slide number three of our presentation material, our third quarter 2005 consolidated income statement on quarter-over-quarter comparison. For the third quarter ended December 2005 AUO's consolidated revenue total NT$59.5b, which is approximately about US$1.8b, represents a 28.7% increase quarter-over-quarter.
Our operating income was NT$5.9b, which is significant 10 times improvement from the NT$532m in the previous quarter.
Net income in the third quarter '05 reached NT$5.8b compared to NT$470m in the second quarter '05. That represents 11 times sequential improvement. For our basic EPS is NT$1.05 per common share. In U.S. dollar $0.32 per ADS for Q3.
Gross margin improved to 15.6% in Q3 '05 from the 6.8% in Q2 '05.
Consequently, our operating margin also improved from 1.1 to 9.9% in this quarter, and EBITDA margins have been returned to 25% level.
In terms of unit shipments, our large size panel shipment grew 13.2% Q over Q, to reach 8m.
And regard to our small and medium size panels, we experienced a very significant growth of 48.7% to total 17.6m we’ve seen this quarter.
Compared to the same period of 2004, the panel prices, such as 15 inch, 17 inch, dropped close to 20%, but we were able to deliver almost the same level of operating income. This proves the margin management of AUO this year was very successful.
Next slide, slide number 4 please. These show brings AUO's nine months ended September 30, '05, with revenue of NT$144.6b, net income of NT$4.2b and Basic EPS to be NT$0.75 per common share. U.S. dollar $0.22 per ADS.
In terms of unit shipment, the nine months ended September 30, 2005 large size panel reached 21.1m, while the small and medium size panel shipment totaled to be about 38m.
Compared to the same period a year ago, unit shipment for large size panel grow 58.2%, and for small & medium size panel grow 61.4%.
Slide number five, on the balance sheet highlights. We continue to see improvement in our overall inventory efficiency despite a very significant revenue and shipment growth in the Q3 '05 to support the seasonal demand.
Inventory in absolute dollar increased moderately from previous quarter. This is mainly to support the increase of the work-in-progress at the Gen 6 fab. However, we did manage to lower our inventory turnover days from 32 days in the second quarter '05 to a record low of 28 days at the end of Q3.
Major changes on the liability and shareholder equity during the Q3 '05 are we drawdown our long term loan facility to meet our CapEx requirement and short term loan payment. On top of that, we also raised about NT$15.6b below ADS issuance in July.
In addition to the earnings improvement in Q3, our shareholder equity has been increased to NT$144b from NT$122b last quarter. As a result, we can see from the balance sheet highlights these helped AUO's debt to equity ratio to improve from 71.2% to 62.7%, and net debt to equity ratio also reduced from 57.7% to 50.6% at the end of Q3 '05.
In regards to our bottom line return to profitability and improved working capital management, I would like to ask you to turn to slide number six, cash flow highlights.
During the quarter, AUO was able to bring its operation back to a strong cash inflow stage, mainly from net income of NT$5.8b and depreciation and amortization of NT$8.9b. This was partly offset by increase in net working capital to support the sales revenue expansion and resulted in net cash flow from operation only about NT$11.6.
Net cash used in investing activities total NT$22.7b, mainly from the capital standing of NT$21.3b. We expect we will spend about the same level of CapEx in Q4, mainly to support G6 equipment. This shall bring our 2005 total capital expense to be around NT83b. That is approximately US$2.6b. About the same level like year '04.
A net balancing total of NT$12b were mainly attributable to increase of NT$2.9b in net debt, and NT$15.6b ADS issuance, offset partially by cash dividend of NT$5.9b.
As a result, AUO ended the quarter with a cash balance of NT$17.4b. Now, let us look at in some business analysis. In the Q3, large size panel accounted for about 85% of our total revenue. Slide number seven provides a quick view on the breakdown of large size panel shipment by application. Due to strong growth of TV and notebook in this quarter, the percentage of LCD monitor panel in our business reduced slightly from the 61% to about 59% of our total large size panel shipment in the third quarter.
On the notebook panel shipments. Notebook panel shipments remained stable at about 22% of our total large size panel shipments, and then on the TV side we continue to see the percentage contribution to rise from 12% in 2Q '05 to 14% in 3Q '05, and we do expect that TV will continue to rise again in our 4Q as our Gen 6 fab rev up.
Lastly, the remaining balance of the 5% sales was supported by general display and audio/video applications involved 3Q and 2Q. Although TV accounted for only 14% of our large size panel shipment today, most of the TVs are, for the large area size. These help the blended ASP trended up nicely. We will discuss this on a later slide.
Please turn to slide number 8. Let us take a look on the application breakdown from a consolidated revenue basis.
TV: TV in our third quarter improved the most. It is about 68% increase of its absolute revenue sequential comparison. As a result, TV posted 22% of our total revenue in third quarter.
In the meantime, Monitor business accounted for about 47% of our revenue in 3Q. For the first time, the Monitor business was poor, below 50% of our total business. This also demonstrated that emerging TV business is becoming the main business driver for the industry and AUO today.
Notebook business remains as 14% of our revenue, and audio/video display, which are mainly small and medium size panels, contributed by seasonality and strong penetration in several new applications resulted in a steady portion of our business.
As we explained earlier, TV has successfully become the second largest revenue contributor in our Q3 '05 to account for about 22% revenues. This representing a 62% sequential increase, a pretty good growth compared to 18% contribution in second quarter '05.
Now, let's move to slide number nine, unit shipment and the blended ASP for AUO's large size panels. The unit shipments of the large size panel increased from 7 million in second quarter '05 to 8 million in third quarter. Blended ASP improved slightly from US$184 to US199.
Now, next slide, slide number 10, let's take a look at what supports this ASP increase. The predominance of PC products was cut in by TV products. Noticeably, the ASP of TV improved to US364 from US316. This is due to our TV products is shifting to a larger size.
The ASP of PC improved moderately to the around US174 and this is supported mainly by the pricing improvement on some of the PC monitor applications in additional to a better product mix. As a result, the blended ASP of large size panel has a price list, as we have noted on slide number nine.
Now, please turn to slide number 10. Let's take a look on the sales of AUO's small and medium size panels. AUO's small and medium size panel from the year of 2002, as you know, small and medium size panels they are more seasonal in nature. Sales in these products, they to turn to peak in third quarter and fourth quarter, and they turn softer in first quarter and second quarters. As a result, at this point in time, we do anticipate the seasonality might take place in Q1 '06.
Now, let's take a quick overview on our installed capacity by fab. Slide number 12, our Gen 6 capacity reached 50k monthly input substrate at the end of September.
We've planned to reach 60k substrate by end of the year 2005, and we do expect our Gen 6 to be fully ramped up to its 90k substrate on a monthly capacity in Q2 '06. With a ramping of Gen 6, we expect it will continue to improve our cost efficiency, especially for large size LCD TV panel production.
As to our third Gen 5 fab, which we call L8C, commencing its commercial production in Q2 '05 has ramped up to 20k substrates monthly capacity by end of September, and we do expect the schedule to be monthly 50k substrates monthly capacity December '05. The schedule will be fully ramping up to 60k capacity by June '06.
With this new capacity planning of Gen 6 and Gen 5 from coming quarters, we believe these shall help further our cost competitiveness as well as better deliver of our commitment to our PC and TV customers in the long run.
There is talk about the AUO's three Gen 3.5, one, Gen 4, and two, Gen 5 packs remain unchanged.
Lastly, based on our current business outlook, management expectation for our fourth quarter '05 performance are as follows.
One, we do expect unit shipment for large panels to increase approximately by mid-teens percentage points from 3Q '05. This improvement is limited by the capacity constraints in fourth quarter '05.
Two, unit shipment for small and medium size panels are expected to experience seasonality decline from 3Q '05 by approximately low teens percentage points.
Three, we also expect blended ASP for large size panels to remain stable compared to that in 3Q '05. This is mainly supported by enhanced product mix. Among the large size panels, we do expect ASPs for PC applications remain stable, and ASPs for TV applications also expect to remain stable in fourth quarter.
This end up my presentation today. Thank you very much, and before we open the floor up for questions, AUO's President and COO, Mr. HB Chen would like to give some remarks about our performance. Mr. Chen.
HB Chen, President and COO
Okay, hello. Good day, for everyone. This is HB Chen speaking. Firstly, thank you to attend this sales conference.
AUO has delivered quite good results in our Q3 performance. I think the main reasons are the first is our very timely ramping up for Gen 6 fab and for the new Gen 5 fab to cope with our very high growth and high demand for TV panels and notebook panels. And, of course, our older product lines, notebook monitor and TV, plus the small and medium size panel has a very good growth, and the capacity contribute a lot.
Secondly, we also did a lot of cost reduction returning to this material sales or product design contribute a lot.
And lastly, I believe that we have the best inventory management. As we mentioned here, our inventory even lower than the last quarter. So, with very efficient logistic inventory control we can have a better performance.
Secondly, I'd like to highlight that our overall performance in Q3 you will compare to the likes of Samsung and LG Philips. I believe that our operating income and net income is quite comparable to these two big names.
And as for Q4, as we mentioned in our outlook, I think AUO team has quite high confidence that we can achieve better our guidance. Thanks.
Julie Chen, Senior Manager of Finance
Operator, open the floor for questions.
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