AU Optronics Corporation Q4 2005 Earnings Conference Call Transcript (AUO)

AU Optronics Corporation (AUO)
Q4 2005 Earnings Conference Call
February 8th 2006, 7:00 AM.

Executives:

Julie Chan, Senior Manager Finance
Dr. David Su, Vice President and General Manager, Consumer Electronics Display
Max Cheng, Vice President and Chief Financial Officer
Dr. Hui Hsiung, Executive Vice President
Dr. L J Chen, Vice President and General Manager Global Manufacturing

Analysts:

CJ Muse, Lehman Brothers
Matthew Smith, CICB
Song Lee Sambu, HSBC
Ajay Sharma, Legg Mason
Andrew Trey, BM
Andrew Root, Asset Management
Daniel Kim, Lynch
Frank Wang, Morgan Stanley

Presentation

Operator

Welcome to the AU Optronics Corporation Fourth Quarter 2005 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 Fourth Quarter 2005 Results Announcement can be found and downloaded from its website at www.auo.com under investors. Again, it's www.auo.com under investors. My name is Hardrie, and I will be conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If at anytime during the call you require assistance, press '*' then '0' and an operator will be happy to assist you. I would now like to turn the call over to Miss Julie Chan, Senior Manager of Finance Division. Please proceed, ma’am.

Julie Chan, Senior Manager Finance

Hi. Good morning and good evening to all participants. This is Julie Chan, Senior Finance Manager of AUO. And here, joined with me, we have Mr. Max Cheng, CFO and VP; Dr. Hui Hsiung, Executive VP; Dr. David Su, VP and General Manager of our Consumer Electronics Display Business Group; and Dr. L. J. Chen, VP and General Manager for the Global Manufacturing. 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.

Before we begin, I would like to state that management’s comments about AUO’s current position 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 results we are discussing today have been prepared on a consolidated basis, in accordance with accounting principles generally accepted in Taiwan, ROC GAAP. You should be cautioned that these accounting principles differ in many respects from the U.S. GAAP. Information as to those factors that would cause actual results to differ materially from AUO’s forward-looking statements may be found in AUO’s Annual Report on Form 20-F, filed with the U.S. Securities Exchange Commission. AUO takes no obligation to update any forward-looking statements, either as a result of new information, future events or otherwise. Please take a minute to read the disclaimer.

Now, if I may, to have you turn to our slide number three of our presentation material. Our fourth quarter ’05 consolidated income statement and quarter-over-quarter comparison for the fourth quarter ended December 31, ’05, AUO consolidated revenue totaled NT$72.8 billion, which is about $2.2 billion, representing 22.3% increase quarter-over-quarter. Our operating income was NT$12.5 billion, which is a significant 111.5% improvement from NT$5.9 billion in the Q3 ’05. The income in Q4 ’05 reached NT$11.5 billion compared to NT$5.8 billion in Q3 ’05, represents nearly doubling situation improvement, while our basic EPS is NT$2.02 per common share, in U.S. dollars $0.62 per ADS for the quarter. With the introduction of new products, continuous improvement on our costs and a favorable foreign exchange, gross margin improved from the 15.6% in Q3 ’05 to 22.2% in Q4 ’05.

Our operating margin also improved from 9.9% to 17.2% and therefore, EBITDA margin reached 31.3% in Q4 ’05. In terms of unit shipments, our large size panel shipments grew 20.4% quarter-over-quarter, to reach 9.6 million due to seasonal demand, small and medium size panels, however, declined by 9.3% quarter-over-quarter, to 15.9 million. Slide number four please. This shows AUO’s year ’05 with revenue of NT$217.4 billion, equivalent to US$6.6 billion, net income of NT$15.6 billion, basic EPS to be NT$2.77 per common share and US$0.84 per ADS. For the year ’05, gross margin totaled 13.7%, EBITDA margin was 23.7% and ROE was 10.9%. In terms of unit shipments for the year ’05, large size panels reached 30.7 million, a 62.6% year-over-year increase. Small and medium size panels totaled 54 million, another 62.2% year-over-year growth.

Now, slide number five, on the balance sheet highlights. During the quarter cash and short-term investments increased by 46.8% quarter-over-quarter, from NT$19 billion to NT$27.9 billion, supported mainly by the business improvement. Inventory, on the absolute dollar amount, increased moderately from the previous quarter to support a significant revenue and shipment growth for the Q4 ’05. Inventory turnover days, however, remained at the same level, 28 days, similar to Q3 ’05. As a result, this helped AUO’s debt-to-equity ratio improved from 62.7% to 60.2%, and net debt-to-equity ratio also reduced to 43.3% at the end of Q4 ’05.

Next slide, slide number six, cash flow highlights. During the quarter AUO generated NT$22.1 billion operating cash inflow, mainly from the net income of NT$11.5 billion and depreciation amortization of NT$10.3 billion. Net cash used in investment activities totaled NT$16.9 billion, mainly for the capital expenditure of NT$17.2 billion. A net financing total of NT$3.5 billion were attributable to the increase of NT$3.5 billion in net debt. As a result, AUO ended the quarter with a cash balance of NT$8.5 billion.

Now, slide number seven, cash flow highlights for the full year 2005. AUO generated NT$48 billion operating cash inflow, mainly from net income of NT$15.6 billion and depreciation and amortization of NT$34.5 billion. This was partly offset by an increase in net working capital. Net cash used in investing activity totaled NT$82.5 billion, mainly for 2005 total capital expenditure of NT$80.7 billion. We expect our 2006 CapEx to be around NT$90 billion to NT$95 billion. The net financing total, NT$43 billion, were attributable to the increase of NT$33.8 billion in net debt and NT$15.6 billion ADS issuance offset partially by cash dividends of NT$5.9 billion. As a result, AUO ended this quarter with a cash balance of NT$8.5 – as a result, AUO ended the year of cash balance of NT$8.5 billion.

Now, then if you look at our business analysis, for this quarter the large size panels accounted for about 89% of our total revenue. From slide number eight provides a very quick overview on the breakdown of large size panel shipments by application. Due to AUO gaining market share in our notebook business and the very strong demand on the LCD-TV in this quarter, percentage of LCD monitor panels in our large size panel shipments reduced 3% sequentially to 56%, and notebook panel shipments increased 2% to 24%.

On the TV side, we continued to see the percentage contribution to rise from the 12% in Q2 ’05 to 14% in Q3 ’05 and 16% in Q4 ’05. The remaining 5% of large size panel shipments were supported by general display and audio/video applications in both Q3 and Q4 ’05. With the LCD-TV demand being stronger than we anticipated, especially 32