Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AU Optronics Corp. (NYSE:AUO)

Q3 2007 Earnings Call

October 22, 2007, 08:00 AM ET

Executives

Julie Chan - Senior Manager, Finance Division

Max Weishun Cheng - VP and CFO

David Su - Sr. VP and General Manager, TV Consumer Products Display Business Group

Analysts

Andrew Abrahams - Avian Securities

Frank Wang - Morgan Stanley

Unidentified Analyst - Lehman Brothers

Jeffery Su - Merrill Lynch

Unidentified Analyst - ABN AMRO

George Chang - Citigroup

Unidentified Analyst

Felix Rusli - Credit Suisse

Unidentified Analyst

Tor Minesuk - Moon Capital

Unidentified Analyst - Macquarie

Presentation

Operator

Welcome to AU Optronics Corporation Third 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' third quarter 2007 results announcement can be found and downloaded at its website auo.com under investors. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

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

Julie Chan - Senior Manager, Finance Division

Thank you. Good morning and good evening to all participants. This is Julie Chan. I am in charge of AUO’s Investor Relations. On behalf of AUO, I would like to welcome everyone to our AUO’s third quarter '07 results conference call.

Joining with me here, we have our President, Dr. L.J. Chen; and Senior VP, General Manager for TV Consumer Products Display Business Group, Dr. David Su; and our CFO, Mr. Max Chang.

As always we will spend the next one hour or so, review our third quarter results, discuss some of the performance highlight trend of the industry, conclude with our fourth '07 outlook. After that we will take your questions. Before we begin I would like to say that management's comments about AUO's current expectations made during this conference call are forward-looking statements subject to significant risk, uncertainties and that actual results may differ materially from those contained in the forward-looking statements. The financial results we discuss today have been prepared on consolidated basis, in accordance with accounting principles generally accepted in Taiwan ROC GAAP.

You should be caution that these accounting principle differ in many aspects from the U.S. GAAP. Information as to those factors that could cause actual results to differ materially from AUO’s forward-looking statements maybe found in AUO’s Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission. AUO undertakes no obligation to update any forward-looking statements, whether as a result of new information, further events or otherwise. Please take a minute to read the disclaimer.

And now we shall begin reporting AUO’s third quarter results. On behalf of AUO’s management team, we are extremely pleased to report that AUO’s third quarter report… third quarter performance not only exceeded our expected guidance, but also exceeded record high in operating results.

In this quarter, we reported net income of NT$22.6 billion, which was about 1.5 times higher than the previous record high in second quarter of ‘07, NT$14.4 billion.

And now please turn to slide number three of AUO presentation material for some of the key highlights. AUO’s Q3 ‘07 consolidated revenue was NT$138 billion equivalent to $4.2 billion, a substantial 30.1% sequential up. And we shift 22.3 million in large size panels, 40.7 million in small medium size panels.

In light of continuous cost reduction, which was supported by the combined efforts of the improvement of production efficiency, placing in new model design, slight loading rate improvements, AUO’s total cost of goods sold reduced 13% in this quarter was attributed to several post merger integration initiatives Company took in the past one year. As a result gross margin for the quarter improved significantly to 23%, bringing operating margin to 18.7%. Net margin to 16.4% and EBITDA margin to 34%, and reported an operating income of NT$25.8 billion, net income of NT$22.6 billion on consolidated basis or NT$22.5 billion as net income attributable to equity holder of AUO. Our basic EPS for the quarter was NT$2.18…NT$2.89 per common share or $0.88 per ADS.

Slide number four, please. On the balance sheet highlights. Cash and short-term investments as of September 30, totaled NT$41.7 billion increased substantially from the previous quarter NT$21.8 billion. Inventory in terms of absolute dollars decreased 4% to NT$42.7 billion. Total inventory turnover days reduced to 38 days from the previous quarter of 43 days. During the quarter, Company paid back NT$9.4 billion of debt and commercial bond conversion and CD conversion, with short-term debt increase NT$3.2 billion and long-term debt decreased NT$12.6 billion. This has held AUO’s debt-to-equity ratio reduced from 86% level to 75% level in this quarter, and net debt-to-equity ratio improved from 77% in second quarter to 59% in third quarter.

Next slide. Slide number five, please. On the cash flow highlights. During the quarter, operating cash inflow was NT$43.4 billion, mainly supported by net profit of NT$22.6 billion. Depreciation and amortization of NT$21.1 billion, offset slightly by net change in working capital. On the net cash used in investing activities totaled NT$12.5 billion, mainly for the capital expenditure of NT$11.5 billion. Summing up for AUO’s first three quarters CapEx, it was NT$38 billion to NT$55 billion comparing with our earlier expectation of NT$90 billion CapEx for year ’07, some of the payment will be paid in early ’08. As a result, our ’07, ’08 overall CapEx remain unchanged at a total of NT$160 billion NT. Our net financing activity of NT$8.9 billion was attributable mainly to the debt payments. As a result, AUO ended the quarter with a free cash flow of NT$31.9 billion and a net cash inflow of NT$20.2 billion.

Now let's take a look at some of the business analysis, slide number six. Revenue breakdown by product application. During the quarter we… the total TV panels sales improved 43% Q-over-Q accounted for 42% of our total Q3 revenue. Monitor panel sales also went up by 23% Q-over-Q, accounted for 28% of our total sales in a quarter. Notebooks marked as 80% of our total sales and other consumer electronic business such as AV/Mobile Device contributed 8% of revenue, and remaining 4% of revenue were supported by general display.

Slide number seven, please. Blended ASP per large size panel shipment. During the quarter, AUO shipped 22.3 million large size panels, that was a 14%... 14.3% Q-over-Q increase, and better than our guidance of high single digits percent growth. With product mix shift significantly to 40 inch and above, blended ASP for TV was up by 11%, marked us $334. Blended ASP for IT was up by 10.9% reached $122 in this quarter. Due to product mix shift to more TV, blended ASP for the large size panel was also up by 14.6% Q-over-Q, and marked us $173.

Slide number eight. By area analysis, shipments per square meter grew 25.8% Q-over-Q, while ASP per square meter improved 4% to $1,378.

Slide number nine. In the quarter, small/medium panel shipments grew 36% Q-over-Q, marked us 14.7 million units. As a result of product mix shift to more medium size panel, revenue supported by this segment increased 34.9% to NT$11.2 billion.

Slide number 10. Other than the incremental 10K monthly capacity are L6B. The monthly capacity of our fab for December quarter expect to remain the same level as Q3. Now for details, please do refer to slide number ten.

Lastly, based on the current business outlook, we expect our Q4 ’07 at large panel shipment expect to remain flat Q-over-Q. IT panel shipment expect to decrease by low single digit percentage point. TV panel shipment expect to increase by low teen percentage points. For the small and medium panel shipments, we expect to decrease by mid single digits percentage points.

As for the blended ASP for fourth quarter, IT panels, we expect pricing for the year, IT panel remain flat, and for TV panel, expect to experience a decline of low single digits percentage point. And our overall loading rate expect to be remain the same level at the high 90%.

This ends our presentation. We shall use the remaining time to take your questions. Operator, can you open the floor for questions.

Question and Answer

Operator

[Operator Instructions].

Your first question comes from the line of Andrew Abrahams from Avian Securities. Please proceed.

Andrew Abrahams - Avian Securities

Hi, congratulations on an excellent quarter. And I was wondering if you could give a little more detail on the cost down and how that broke out, so we could get a handle on where the actual savings were?

Max Weishun Cheng - Vice President and Chief Financial Officer

This is Max Cheng. I am trying to answer your question. Regarding the cost savings in Q3, actually the loading rate improved about 4% to 5% from Q2 [inaudible] to about 100% Q3 and also we have a cost down on the material side about 3% to 5%. So, overall, I guess, we are saving about 5%, okay… I mean improved 5% quarter-on-quarter that would be the number we achieved.

Andrew Abrahams - Avian Securities

And could you talk a little bit about your CapEx, the way the spending will go into 2008? What percentage of your 2007 will push through into 2008 in terms of actual cash spending?

Max Weishun Cheng - Vice President and Chief Financial Officer

Okay. Regionally, we though, this year we are going to spend about NT$90 billion for ’07. But now based on our current capital expenditure number, we predict, this year would be only NT$70 billion. The reason is because the payment schedule has been delayed. Actually, our CapEx item has been proceed at our original schedule without any delay. So, the NT$20 billion may postponed to ‘08. So, I guess, in last quarter, restraining in ‘08 we may have a NT$70 billion CapEx, now the number… now that could be higher just because the postponed also in this year to ‘08 exclude the reason.

Andrew Abrahams - Avian Securities

Right. So, if you look at CapEx in ‘07 as NT$70 billion and ‘08 as NT$70 billion because of the payments, is at the rate now?

Max Weishun Cheng - Vice President and Chief Financial Officer

That ‘08 could be higher than NT$70 billion, that could be NT$85 billion to NT$90 billion, that’s the number we forecast that… NT$70 billion is the original number we thought that going to happen in ‘08, apart that NT$20 billion which put from ’07. So, at the end, the number for ‘08 could be NT$85 billion or could be NT$90 billion.

Andrew Abrahams - Avian Securities

Got you. Thank you very much.

Max Weishun Cheng - Vice President and Chief Financial Officer

You are welcome.

Operator

Your next question comes from the line of Frank Wang for Morgan Stanley. Please proceed.

Frank Wang - Morgan Stanley

Hi, good evening. There is size pressure come up and retail price is hard to increase given that potential income and market demand. In 2008, given that we have a shortage piece of panel price were likely to have room increase again. Can you talk about what kind of room that the downstream customers or the retailers have without raising the retail price impacting the end of it [ph]?

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

Frank, this is David. To answer your question, as for this end market price causes… actually it quite difficult to predict this retailers behavior. and even through the panel prices could have a possibility to increase the price in the next year, but for the end products I believe through channels efficiency improved through some total TV setup cost reduction they still might have a chance to reduce the TV set final price. So, in the current stage, it is difficult for me to give you a forecast for what will happen, and next year, this timeframe for the TV set price, but if we judge from the past experiences for consumer products is the price of the products always is goes down. And so, next year, this timeframe probably for the panel… the TV set price will be cheaper than what we saw today.

Frank Wang - Morgan Stanley

Okay. Thank you.

Julie Chan - Senior Manager, Finance Division

Operator?

Operator

Are you there?

Julie Chan - Senior Manager, Finance Division

Yes. Operator, can you take the next question, please?

Operator

[Operator Instructions].

Your question is queued up from [inaudible] from Lehman Brothers. Please proceed.

Unidentified Analyst - Lehman Brothers

Hi, good evening. I just had a couple of questions. Can you talk about what your current plans are for L7B and sort of set a schedule for the ramp in production there?

L.J. Chen - President and Chief Operation Officer

This is L.J. For 7C actually this is our second phase of our GEN 7.5. So, we plan that to move in by Q2 of next year, I mean that 2008. Then, the target that to have launch in the market potentially by Q3 of the year 2009. I think that’s our plan.

Unidentified Analyst - Lehman Brothers

And what's max… maximum capacity area that you can get there now.

L.J. Chen - President and Chief Operation Officer

The phase one little bit… about for the 40K to 60K at the end the total numbers for second phase of GEN 7.5, 100K.

Unidentified Analyst - Lehman Brothers

Okay. Great. And then can you talk about what kind of inventory situation you are seeing in the N-Chip [ph] and demand? And just overall the retail channel if there’s any sort of build up or inventories is actually below seasonal levels?

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

Yes. This is David. To answer your question, particular in this TV factories compare with the inventory level the same time last year, currently actually it’s below compared with last year. So, at the current stage, it is considered as low inventory level, especially in the U.S. and in the Europe. And the estimate, the number we talked to our… from stable resources indicate the current device compared with… probable they won’t use to be as a higher of two weeks normal than what we use to have. So, overall, the current TV inventory, I would say it has been a hazy condition and which to the hot Christmas season coming, they would certainly make or they make a actually are quite aggressive in try to give the modules on panels from us to fact this could on the current stage.

Unidentified Analyst - Lehman Brothers

Got you. And then, I guess given this outlook for… just the current levels of low inventory and outlook for very strong fourth quarter. How do you look… how do you think about utilization in the March quarter for you guys and potentially even for the industry?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes. I guess, little bit 95% to 100%, I guess, most of time we run the fact with 100% those inventory.

Unidentified Analyst - Lehman Brothers

And in March, too.

Julie Chan - Senior Manager, Finance Division

We… yes, we will in three months later, we will give March quarter’s guidance.

Unidentified Analyst - Lehman Brothers

Okay. But do you see they are actually having down just because of the reserve seasonally weaker quarter or it just given the tightness of panels, I might it will be pretty strong?

Julie Chan - Senior Manager, Finance Division

I think in the afternoon session, our management team commented in the low season and we… number one, we will not give any inventories. So, as of now, too early to guide March quarter.

Unidentified Analyst - Lehman Brothers

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Jeff Su from Merrill Lynch. Please proceed.

Jeffery Su - Merrill Lynch

Hi. I had a three questions, is that okay? Firstly, I just want to clarify something on the 8G fab, that you guys were talking about on the revaluation. Is… I think I heard HP say this afternoon that, if you decide to go forward, the production timing will not be until likely… until next production in 2010, is that correct? I just want to clear, if any confusion.

L.J. Chen - President and Chief Operation Officer

Yes. I think that’s… because for new generation… actually it takes a longer, that’s typically valued in 18 months to 20 or 22 months. So, I don’t think that we want to jump into that… but if that the new generation that typically I think from now that’s to… their month’s production and I think that’s year 2010. I think that’s the roughly schedule.

Jeffery Su - Merrill Lynch

Okay. Great. And then secondly maybe more so for Max, and looking at the third quarter number and looking at the net debt to equity ratio that has come down actually quite, okay, in the third quarter. I was just wondering, if you can remind us sort of, what is the targeted or in sort of the ideal level that you are looking in terms of debt to equity?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes. By end of this year, I guess, the numbers are tent to 40 something. Going to next year, definitely we have… under the current situation, we believe the number could continue to come down. At that time, I believe, the management team here is believe… yes, we might continue to cut our debt ratio or we might higher dividend. So, I would say, 30% to 50%, I would say that’s quite comfortable level that should be keep it lower or we can have a higher leverage, highly depend on the market situation and also the sort of the management team, how are you going to maintain our business. So, it’s hard to say at this moment, but basically, we will keep between 30 to 50 in next year.

Jeffery Su - Merrill Lynch

Okay. Great. And then lastly, just a very quick question on the sort of longer term the industry landscape. I guess one another things that you had talked before was probably sort of looking at the panel side and the assembly side, and of course, we see one trend in the industry, one movement in towards the panel plus assembly type of business model, whether it’s Innolux or TMA/PBD [ph] et cetera, et cetera. Well, I don’t know, if you can maybe share with us and your thoughts in terms of this pros and cons of this type of strategy. And what AUO in particular is looking to do? And potentially maybe working with, I guess, [inaudible] or whomever to achieve this goal. Just want me to understand the strategy expense?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes. Jeff, what we try to do is, how could we get a higher return on investment? So far, it’s hard to say… we are going to kind of reduce our module revenue because that might give us maybe high pressure on return on investment. So, at this point, we see a try to keep it the higher turnover from our investment, so which mean, which we see a pretty a module assembly and quite important for us. But due to some reasons such as BAT concerned on Europe market because of long lead time for those shipment to front end market to reduce those inventory cost. So, we may have some subcontractor to mitigate those issue and also seasonality concern. So, we might increase some of those module subcontractor, but not all of them. That’s basically what we are thinking for the time being.

Jeffery Su - Merrill Lynch

Okay. Great. Thank you very much.

Operator

[Operator Instructions].

Your next question comes online Jeffrey Todder [ph] from ABN AMRO please proceed.

Unidentified Analyst - ABN AMRO

Hi, good evening. In the afternoon session today, there was quite a lot of discussion about continuing shortages or very tight supply demand situation at least over the next years. And you mentioned earlier in this call that consumer product prices tend to fall over time. How do you kind of put those two types of data point together or shortage terms indicate the panel prices would be strong, but end product price pressure might come down? So, how do you think the shortage situation might affect your margins and profitability say over the next two years?

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

Okay. This is David. In answering your question, concerning of the supply demand and also the pricing was sort of cost time effort is the… our view is for TV market certainly the past experience is that final set price is tend to decrease every year. However, during period… during every year, there is lots of cost reduction therefore money involve that include the simplified the design to use this cost… this component counts to reduce the cost. That’s one. The other lines have more efficiency operation, more shorted like inventory day or try to improve return of a delivery. This is the area that can reduce the cost also and certainly the margin coming from this channel or from distributor or even from the brand name this year they have room to improve. So, our belief is all probably involved in this logistic chain, everyone have responsibility to reduce their cost, but still maintain a good profit. I think that’s the all people evolve in this food chain that should try to work harder to improve their cost structure to meet… see the market this nature of set price decrease every year.

Unidentified Analyst - ABN AMRO

So, would that indicate I guess panels have been in shortage, say your margin has risen for looking out further, would you think that if the supply demand situation remain tight, we would see prices falling inline with cost and margins staying relatively stable at current levels? Do you think that we would be able to see an expansion in margins?

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

We certainly like to see our improvement in this margin, but in the mean… same time we have to work with our customers and even in the channel to improve the total cost structure to… maybe so, our view is certainly we would like to keep our margin. We have improvement in our margin, but we have to make sure our pattern, they have enough cost on the effect to maintain proper margin, so, our industry stay here.

Unidentified Analyst - ABN AMRO

Okay. Thank you. One other question, LTL talked a lot about improving efficiency and its older fabs. And they are actually squishing quite a lot of capacity beyond the general design capacity limits. And if I look at your capacity guidance for next year of about 18% increase, it looks like most of your older fabs are staying at… I mean you are adding some capacity to the more advanced fabs, but it doesn’t look like you are planning or guiding for an increase in capacity in every older fabs, is that correct?

L.J. Chen - President and Chief Operation Officer

Yes, this is L.J. I think with regard… that CapEx, next year, yes, it’s a new CapEx, 18… by our L7A and L50 that’s for our Gen 6. We feel that’s a slightly improve internally our old generation fab… our current generation. And I think that’s efficiently improvement that [inaudible] that’s we accounted around 5% that improve that year-to-year. That including the daytime [ph] improvement and also the improvement… efficiency improvement and the optimization on the product. This is also so important because… right now we have many fab that expect to emerge, so we can easily concern to identify that’s the product specialized to put that fab on fab and improved efficiency. So, that’s also can count the overall efficiency improvement that’s for the year.

Unidentified Analyst - ABN AMRO

And so, looking at capacity instead of the 18 which comes from actually new glass capacity than maybe add 5% for improvements in efficiency, so we get about 23% increase in overall capacity for next year?

L.J. Chen - President and Chief Operation Officer

I mean that is 5% our target for mid year… or generation fab improvement.

Unidentified Analyst - ABN AMRO

Okay. Thank you.

Operator

Your next question comes from the line of George Chang from Citigroup. Please proceed.

George Chang - Citigroup

Yes, good evening, guys. Thanks for taking my question. Couple of things to clarify. First, Max, I think you talked about… or someone mentioned about that fab 7B will have the capacity of 40K, can you clarify that? I wasn’t quite clear exactly what that means.

Max Weishun Cheng - Vice President and Chief Financial Officer

Okay. The total capacity in 7B could be 100,000.

George Chang - Citigroup

100,000. So, your fab 7A will have a total of 75 by next year. So, which means your total Gen 7.5 can have 180K?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes. Above that number.

George Chang - Citigroup

Above that number. When do you--?

Max Weishun Cheng - Vice President and Chief Financial Officer

Next year.

George Chang - Citigroup

Right, right. I understand. You were start ramping up the 7B in 2009, right?

Max Weishun Cheng - Vice President and Chief Financial Officer

That’s right.

George Chang - Citigroup

And how much of your ‘08 CapEx is dedicated for 7B?

Max Weishun Cheng - Vice President and Chief Financial Officer

I guess pretty much of… our next year CapEx would go into 7B.

L.J. Chen - President and Chief Operation Officer

7B. We just start to moving the equipment. So, the capacity contribution that the year 2009… next year 2008.

George Chang - Citigroup

Right. And I don’t’ quite understand, I mean, it seems it is a Gen fab at 7A. If you start moving the equipment in middle of 2008, why does it take you almost a year to ramp up the production?

Julie Chan - Senior Manager, Finance Division

You are asking about capacity, right?

George Chang - Citigroup

Yes, I thought someone mentioned about that 7B will stat ramping up production in second quarter ’09, but equipment moving is about mid-off 2008. So, there seems be almost a three quarters of lagging. I don’t know maybe I misheard that.

L.J. Chen - President and Chief Operation Officer

We would start to moving the equipment by [inaudible] mid year.

George Chang - Citigroup

Right. And how about production?

L.J. Chen - President and Chief Operation Officer

Actually, that’s by early of the Q… late of the Q1 or early of the Q2 by year 2009. Then pretty lumpy that so we have the Q3 of the year 2009.

George Chang - Citigroup

Okay.

L.J. Chen - President and Chief Operation Officer

So, I mean that Q3 is a pretty…

George Chang - Citigroup

Okay. And when can we expect to see 100K of this 7B, maybe by the end of 2009?

L.J. Chen - President and Chief Operation Officer

No, that’s… I think that’s a fall of 100K… I believe that will be year 2010. So, that might be lag to the year 2011.

George Chang - Citigroup

Okay. I see. One more question, since you guys are generating huge amount of free cash flow this year and next year, what’s the likely policy on cash dividend? If I recall correctly, 2004 was good year and payout was about 20% something during that year, if I did not mistaken. So, what’s likely for next year when you declare the cash dividend? I mean how do you want to improve your ROE… by paying more?

Max Weishun Cheng - Vice President and Chief Financial Officer

Okay. George, I guess that will be the direction. So far, we did not finalize the direction we have thought. But basically, we will try to pay higher dividend in next year. Under one condition, if we can continue to… I mean come uppish from operation then definitely we could have this kind of capability. And if we can continue to manage the CapEx amount under our current level, then I guess the payout ratio will be higher than 20% definitely.

George Chang - Citigroup

Do you think… what’s like the maximum on payout ratio? Assuming everything is in tag with what you describe here in terms of CapEx or supply demand or panel pricing?

Max Weishun Cheng - Vice President and Chief Financial Officer

Well, because… first of all, we have tried to cut our net debt to 30% or even little lower. So, that would be the first thing we have to do in early of next year. So, that’s the reason why we may not be able to afford a 60% or 70% payout ratio in next year. But we will try to do maybe… I have no idea yet, but I guess it be around 40% 50% hopefully, that would be the range, but could be lower. They were highly dependent the operation situation in next year.

George Chang - Citigroup

Okay. It sounds like minimum you are looking at something like 30% on these, right?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes, I guess it would be… my own idea will be 30% to 50%, that kind of range, but definitely that would be the call of the Board of Director.

George Chang - Citigroup

Don’t worry Max, I am not going to hold you responsible for that.

Max Weishun Cheng - Vice President and Chief Financial Officer

Well, thank you.

George Chang - Citigroup

Thank you.

Operator

Your next question comes from the line of Frank [inaudible]. Please proceed.

Unidentified Analyst

Hi, good evening. This is Frank [inaudible]. I just one question about the demand for monitor. I think in afternoon session, L.J. mentioned that the demand for monitor panel is about 5% to 10% more than your originally expectation. And can you elaborate a bit on where do you see that slowdown comes from? And also with the slowdown, lately inventory adjustment at year-end, given the monitor panel demand was so strong in the past few months. And lastly, the reason that caused the slowdown in the monitor segment, will that be also a concern from the TV segments? Thank you.

L.J. Chen - President and Chief Operation Officer

This is L.J. As I mentioned that’s in afternoon meeting that’s I think that’s a due to [inaudible] so, it will only depend on in this… especially that’s at November timeframe I think that why we can that fitting on that adjustment. I think this is a decision… second, there is I think this is also year-end I think by the December timeframe most of brand customer also trying to adjust their inventory level. Even thought, right now, the inventory stay very healthy, but I think every year that’s… the year-end that’s they make brand companies that try to minimize their inventory. So, we see that such kind of adjustment, but I feel compared to that year than this year to more healthier than last year.

Unidentified Analyst

Okay. Thank you.

Operator

[Operator Instructions].

Your next question comes from the line of Felix Rusli from Credit Suisse. Please proceed.

Felix Rusli - Credit Suisse

Hi, good evening. Can I just get a clarification on CapEx slip? I guess going from NT$90 billion to NT$70 billion this year and vice versa of next year. What exactly is that… you mentioned that you can delay some payment to next year? Can you maybe clarify that a bit? And also can you confirm that you are not spending any money for Gen 8 in 2008 that’s all… most of the CapEx will be L7B and then I guess other expansion. Thank you.

Max Weishun Cheng - Vice President and Chief Financial Officer

Okay this is Max Cheng. I will try to answer your question. Because an earlier [inaudible] I have to say second half of last year, our business was quite terrible, so at that time when we tried to procure some new equipment, we had a different payment schedule for those new CapEx in this year. So, which mean our vender allows us to pay them a little bit lower percentage compared to the earlier generation, so, which means we could pay them in different periods. So, even this year, we are moving along with payment, but some of the payment, I guess we can pay them in next year. So, that’s the reason why at the end our total for this year, the payment could be lower than NT$90 billion. That’s why we saw at our fiscal… for Q3 and we predict the total of this year could only be only NT$70 billion. That could be the case. But in the end, we have to pay them. So, that could be in ’08.

Felix Rusli - Credit Suisse

Sorry, Max, so, this will be for existing equipment or--?

Max Weishun Cheng - Vice President and Chief Financial Officer

Existing equipment, that’s right.

Felix Rusli - Credit Suisse

And then for sort of NT$90 billion for next year, that will not include any thing for Gen 8, can you confirm that?

Max Weishun Cheng - Vice President and Chief Financial Officer

Not included, okay. Even we start the Gen 8 project in ’08, the payment that would be very limited because suppose there will be only in kind of CapEx for building only… that would be a very small amount and we are going to spend the construction for two years before we see the equipment move in. So, the NT$90 billion will not include the Gen 8 or the new generation CapEx.

Julie Chan - Senior Manager, Finance Division

Yes, if I may repeat in the afternoon session, management commented our Gen 8 is under evaluation, and perhaps by the end of the year, we would have a more concrete response on the Gen 8 offering.

Felix Rusli - Credit Suisse

Right. Thank you.

Operator

Your next question comes from the line of Irene [inaudible]. Please proceed.

Unidentified Analyst

Hello. Can you hear me?

Julie Chan - Senior Manager, Finance Division

Yes. Hi, Irene.

Unidentified Analyst

Hi, Julie. I just have two questions one on cost reduction and the other one on the productivity improvement that Max was speaking about. So, on cost reduction I think it was mentioned that total cost of 13% reduction was achieved in third quarter? Was that actually the correct number?

Julie Chan - Senior Manager, Finance Division

Okay. In terms of total cost of goods sold on Q-over-Q comparison, it did came down rather wise, okay. Not all cost reduction. I think the cost reduction it is kind of difficulty to calculate. I think earlier net income that in our own effort probably about in the neighborhood of 5% plus and we do have some component support and now there is 3ish. If you look at the total cost per square meter Q-over-Q comparison, the number seems to be very nice like 10%, but so difficulty to say exactly what was the cost reduction though.

Unidentified Analyst

Right. Okay. And I guess the bulk of the merger related cost benefit sort of happened in Q3. Will that sort of continue on in Q4 and would there be a guidance in terms of sort of the sort of cost per meter square cost reduction?

L.J. Chen - President and Chief Operation Officer

This is L.J.. I think that’ cost reduction typically that’s what we target for 3% to 5% for any quarter. And this year actually on Q1 to Q3 we achieved such kind of target as around 3% to 5%, that including the component cost reduction and utilization improvement, but for Q4 actually because the whole supply chain actually a little bit tight. So, that means the improvement under component-wise, the rooms not the peak. And second that’s for capacity utilization as mentioned earlier that we already achieved that very close to 100% utilization for all the generation. So, for Q4 that’s the estimate that’s around 2% to 3%, the cost reduction, I think that’s the number.

Unidentified Analyst

Right. Okay, thank you. The other question is relating to productivity improvement, I think early was mentioned about 5% productivity improvement, just a simple question, does this actually translate into a 5% improvement in capacity in 2008, just excluding L7B?

L.J. Chen - President and Chief Operation Officer

Could you say your question again?

Unidentified Analyst

Sure. Just you mentioned earlier that I think, productivity improvement of 5% could be expected in ’08, just on the older generation fab, so my simple question was that a 5% productivity improvement, does this actually mean that capacity increases by 5% on the older generation fab?

L.J. Chen - President and Chief Operation Officer

I mentioned that’s… that’s our target. That can be achieved by improvement efficiency and also the simplify the product that in the fab. So, I think that’s a target. Such kind of improvement actually that’s the way you not necessary to put the money that’s increment, but sometimes that’s might be that’s we need to that’s modify the increment. So not the big money, but maybe that’s need as some of that to product to improve to modify. So, I think 5% of we fix that might be can be achieve by such improvement adjustment.

Unidentified Analyst

Okay. Sorry, I just have one last question, on OpEx. OpEx continues to go down again, so I guess, it come off from about 5% level to I think now 4.3% level. So, is this sort of like what you think is a normalized sort of OpEx level going forward?

L.J. Chen - President and Chief Operation Officer

Yes, I guess about 4% to 4.5%, under the… this scale we have at this moment. But our topline, it could change all depend sometime it could becomes smaller than… definitely but the percentage wise will become higher.

Unidentified Analyst

Good, alright, thank you very much.

L.J. Chen - President and Chief Operation Officer

Thank you.

Julie Chan - Senior Manager, Finance Division

Now operator, due to time the concern, can we take perhaps the last two questions.

Operator

Your next question comes from the line of Tor Minesuk from Moon Capital, please proceed.

Tor Minesuk - Moon Capital

Hi guys. Congrats again for the great results. I have two quick questions, one, can you give us an idea in terms of profitability ranking in Q3 between notebooks, monitors, and TVs?

Julie Chan - Senior Manager, Finance Division

Tor, we don’t disclose the application margin.

Tor Minesuk - Moon Capital

Okay.

Max Weishun Cheng - Vice President and Chief Financial Officer

Tor, because actually we do not have that kind of numbers internally. Because those department, they just received their allocation from headquarters. We assigned set to them. So, the gross margin for us, it doesn’t mean very much internally.

Tor Minesuk - Moon Capital

Okay. That’s fine. I just to understand better in terms of your capacity expansion, when you mentioned the 18% for next year. That’s on area basis?

Max Weishun Cheng - Vice President and Chief Financial Officer

Yes.

Tor Minesuk - Moon Capital

And do you have an estimate of how much do you think that supply growth for the industry will be in 2008?

Max Weishun Cheng - Vice President and Chief Financial Officer

In 2008, the price is at around 20% to 21%. That’s for the whole industry.

Tor Minesuk - Moon Capital

Okay. And what about…. is there a big difference between supply growth and shipment growth for the industry in 2008?

Max Weishun Cheng - Vice President and Chief Financial Officer

Excuse me. That’s a…. I mean that’s the 20% to 21% in area so that doesn’t surprise… area, unit.

Tor Minesuk - Moon Capital

Okay. Because I think, it would LPO [ph] made that guidance, they actually mentioned something about… there’s a difference between… even on an area basis the capacity growth and the shipment growth just due to higher utilization in the first half of the year. It’s obviously this year you didn’t run that. The panel makers didn’t run that full utilization the first half. So I’m just wondering, given that maybe the utilization could be a little bit more higher in the first half next year. Would there be a significant difference between capacity growth and shipment growth on the area basis.

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

Yes, this is David. In answer to your question, yes, this is especially this TV area even though the whole year the area growth has done much, Tor if for TV there’s an area even the first half and second half picture is quiet imbalance. So in order to take full advantage of that area growth, certainly be the first half we need to have a better utilization over that, and that’s an area I believe was our customers and the recado [ph] we are working on these subjects try to utilize or a capacity of wherever next years try to increase the shipment quantity.

Tor Minesuk - Moon Capital

Okay. So, it seems like your first half of next year is going to be running at a little bit higher utilization. Would that be at the expense of, would you try to build up inventory in anticipation of higher season or tight demand and tight supply in the second half of ’08? Or do you think the customers will be able to kind of pull in their demand a little bit to the first half to alleviate any tightness in the second half?

David Su - Senior Vice President and General Manager, TV Consumer Products Display Business Group

Our principal is not like that. We will not make any inventory for that. So, I think that situation is true. It’s very true in TV area. So, we are working with our customers. They are our demand and they are waiting to put and certainly we will do, but if no demand from our customers, we will not make an inventory there.

Tor Minesuk - Moon Capital

Okay, great. Thanks again.

Operator

Your next question comes from the line of Tammy Life [ph] from Macquarie, please proceed.

Unidentified Analyst - Macquarie

Hi, thanks for taking my question. I’m just wondering if you can provide any rough guidance for fourth quarter in the operating side as well as non-operating expense break down for fourth quarter.

Julie Chan - Senior Manager, Finance Division

Are you asking for an operating break down?

Unidentified Analyst - Macquarie

Yes, I’m asking for the guidance for the non-operating side.

Max Weishun Cheng - Vice President and Chief Financial Officer

Okay, basically at this moment, we predict we are going to have NT$1.4 billion for interest expenses plus there is [inaudible] so usually you can expect about NT$1.4 billion expenses for can not.

Unidentified Analyst - Macquarie

Okay, great. And how about the breakdown for the quarter.

Max Weishun Cheng - Vice President and Chief Financial Officer

The second quarter would be…. yes, the interest expenses still about NT$1.3 billion but that time we have exchanged again about NT$0.3 billion and that below NT$1 billion expenses for in that.

Unidentified Analyst - Macquarie

Okay, great. Thanks.

Max Weishun Cheng - Vice President and Chief Financial Officer

You are welcome.

Operator

At this time, there are no further questions in the queue. I would now like to turn the call over to Miss Julie Chan for closing remarks.

Julie Chan - Senior Manager, Finance Division

On behalf of AUO, we’d like to thank you for your support and participating in our earning’s call and if you have any questions, please contact us ir@auo.com. Thank you for your support. Bye-bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AU Optronics Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts