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Edited Transcript of 2409.TW earnings conference call or presentation 30-Oct-19 6:00am GMT

Q3 2019 AU Optronics Corp Earnings Call

Hsin-Chu Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of AU Optronics Corp earnings conference call or presentation Wednesday, October 30, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin Tseng

AU Optronics Corp. - CFO, CAO & VP

* Fu-Jen Ko

AU Optronics Corp. - President, COO & Director

* Julia Chao

AU Optronics Corp. - Head of IR Department

* Shuang-Lang Peng

AU Optronics Corp. - Chairman & CEO

* Tien-Yu Lin

AU Optronics Corp. - VP & GM of Mobile Solutions Business Group

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Conference Call Participants

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* Jerry Su

Crédit Suisse AG, Research Division - Director

* Sharon Shih

Morgan Stanley, Research Division - Executive Director

* Yu Jang Lai

Citigroup Inc, Research Division - Director & Analyst

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Presentation

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Operator [1]

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Welcome to AU Optronics 2019 Third Quarter Results Conference Call. (Operator Instructions).

Now I'd like to hand over to Ms. Julia Chao, AUO's IR Officer.

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Julia Chao, AU Optronics Corp. - Head of IR Department [2]

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Thank you. Ladies and gentlemen, good afternoon. This is Julia Chao, AUO's IR officer. On behalf of the company, I would like to welcome you to participate in today's conference call. Joining me here are 4 executives: Mr. Paul Peng, Chairman and CEO; Mr. Frank Ko, President and COO; Mr. T.Y. Lin, Senior VP of Business; and Mr. Benjamin Tseng, our CFO. The agenda for today is as follows. First of all, Ben will go over our Q3 results and provide you with our guidance for Q4. And then Paul will provide you with an opening remark. Then we will start with our Q&A. We have collected questions from analysts. We will first address these questions for the first part of the Q&A. Afterwards, we will open the floor for you to call in. So this is our agenda.

Now before I hand over to Ben, I would like to remind you that all forward-looking statements contain risks and uncertainties. Please also spend some time to read the safe harbor notice on Slide Number 2. Ben, please.

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [3]

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Good afternoon. I would like to go over our Q3 results. During the quarter, we saw an increase in the shipments of notebook panels and niche products, which have been our key focuses. However, as large-sized panel price decline deepens, our net sales came in at TWD 70.1 billion flat Q-o-Q due to the sharp decline of ASP. Our profits took a toll. Gross loss was TWD 20 -- TWD 270 million. Op loss, TWD 540 million, net loss attributable to owners of the company was TWD 4 billion. EBITDA margin was 5%. The EBITDA margin of the Display segment was 5.2%.

Balance sheet. Cash was TWD 71.1 billion NTD, down by TWD 8.9 billion Q-o-Q. Debt, short-term and long-term debt combined was TWD 107.6 billion, flat Q-o-Q. Gearing ratio was 18.4%. Inventory turnover were 34 days. Both of these indicators were maintained at very healthy status.

Cash flow. We generated from operating activities, TWD 3.9 billion NTD. CapEx lower slightly to TWD 7.4 billion NTD. We had an outflow for financing activities, a cash dividend payout of TWD 4.8 billion NTD.

Revenue breakdown by application. Due to the slump in ASP TV's share lowered to 30%. Monitor share was maintained at 15%. Mobile PC and device share went up by 3 percentage points to 29%, reflecting the stronger notebook panel stock in demand in Q3.

The Commercial and Other segment was 26%, up by 3 percentage points Q-o-Q thanks to the increased contribution of car displays, industrial displays, entertainment and gaming panels.

Next slide, revenue breakdown by size. The 39-inch and above segments share was 28%, down by 6 percentage points Q-o-Q. Again, this reflects lower TVSP. On the other hand, due to the increase in notebook panel shipments, the 10-inch- to 20-inch segment had its share going up to 35%. Tonnage in the below segment has its share going up to 20%, again, due to the increased contribution from car, industrial gaming, entertainment and wearable panels.

Next slide, shipments and ASP by area. Area shipment increased by 3.3% Q-o-Q. ASP per square meter was affected by oversupply, that's going down by 3.4% Q-o-Q. Small and medium-sized panel shipments by area and revenues. In Q3, area shipment increased by 7.8% Q-o-Q, driven by car displays, industrial displays, gaming, entertainment, panel shipments. Small and medium-sized revenues increased by 11% Q-o-Q.

Now for our Q4 guidance. Large-sized panel shipments are expected to be down by a mid-teens percentage points Q-o-Q. Blended ASP denominated in the USD is expected to be down by low single-digit percentage points Q-o-Q. Small- and medium-sized panel shipments are expected to be down by high single-digit percentage points Q-o-Q. Overall loading rates in Q4 are expected to be lower than the previous quarter. So this was an update on our Q3 results and a guidance for Q4.

Before we proceed with Q&A, I would like to turn over to Paul for an opening remark.

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [4]

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Ladies and gentlemen, good afternoon. This is Paul. This has been a tough year for the entire panel industry. Besides working on improving our performance, AUO has been making preparation for improving our mid- to long-term performance as well. One of such moves include we've made appointment of a new President, Frank Ko. Frank will be our new President and COO, and his appointment started in September this year. Before 2013, Frank have been with AUO for a very long time. He is very familiar with the business of AUO. For the past 6 years, he was with another company in the relevant industry. He's been a veteran of new market and application development. We are impressed with his performance. As the Board of Directors of AUO decided to hire him to lead the team as we seek to develop new applications and solutions going forward. So I just would like to take this opportunity to briefly introduce Frank and also welcome him for joining AUO.

Now back to the business performance of us in Q3. Although Q3 is the traditional high season, the seasonality hasn't been as strong as before. Due to trade tensions, customers booked panel allocations earlier than before, driving up the consumer market segments' inventory levels. This has caused restocking demand to weaken for, especially, commodity and consumer products in the high season. That said, AUO still registered shipment growth in Q3, mainly thanks to our long-term efforts. Our non-commodity products, such as automotive, industrial gaming and premium notebook panels performed relatively well. The combined revenue shares of the Mobile PC and Device and Commercial and Other segments increased 10% Y-o-Y. These products remain to be the key areas that we need to place more focus on and pay more efforts on. Also these are the segments that we can really play to our advantages because these product lines are characterized by low volume, high variety, high customization and high technical barrier. And it just so happens, AUO has strengths in these areas. That is why we want to place more focus on these segments. The large generation capacity ramps from Chinese firms have taken a big toll on TV panels. This has exacerbated the oversupply situation of the industry. With irrational competition, panel ASP lower significantly. The drop was especially significant in the large-sized segments in Q3. The consumer segments of TV panels' profits also slid, which affected negatively our revenue and profits. Although we had shipment growth in Q3, revenue maintained at TWD 70.1 billion NTD. The bottom line was worse than last quarter. And our loss widened. We've taken some mid- to long-term measures in hopes of improving the bottom line at a quick pace. While we posted lackluster profits, if you look at our balance sheet, you would know that our inventory level was quite healthy at 34 days. Gearing ratio was 18.4%.

Comparing to many competitors, we have a healthier financial structure. The macro uncertainties would affect the consumer segments. And the impact has been huge, and the additional capacities in the industry caused the oversupply to worsen. Traditionally, in -- as we enter the mid- to the latter-half of the Q4, low season will begin. Today, we expect that the oversupply will likely to continue for a period of time. But if you look at -- if you reach -- you have read some reports recently, you would know that the increased capacity would peak in 19 -- 2019. Going forward, there will be a decrease in new capacity investment and some panel makers have made adjustments to their capacity, or delayed the timing of mass production, even -- some even transformed their existing production lines to produce other products. As a result, the additional capacity may be less than previously expected. As for Q4, we've guided that revenue will be down because of smaller shipments on the back of UT rate adjustments and annual maintenance, as well as new product development activities. And this will be part of our efforts to prepare for the new product launches of our customers for next year. The panel industry is in the downturn. But we remain committed to our strategies, maintaining financial health, creating more values and technical innovation. These commitments remain the same. We've been able to post profits for the past few years. As a result, we have been very healthy in terms of financial structure. At the same time, we have executed our smart investment strategy very disciplinedly. And we have been focused on high value-added and premium investments. Although, we do see some lower profits at the moment, we will execute very prudent cost control and expense control. This will include our CapEx management and also to improve our cash flow. On the back of a healthy financial structure, you will continue to focus on value transformation and technical innovation. We will also explore value-added market segments in hope of develop more niche products and to make a turnaround. We have been working relentlessly toward these goals. Thank you.

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Questions and Answers

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [1]

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Thank you, Paul. Now we would like to start with the Q&A. For the first part of the Q&A, we will first address the questions that we have collected from analysts. The first group of questions again are about market update and outlook. The first group -- the first question's just about an update on 2019 worldwide panel supply and demand. The second question is about Q3 TV sell-through and Q4 demand outlook. Frank, would you please answer these 2 questions?

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [2]

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Thank you, Ben. Ladies and gentlemen, good afternoon. It is my pleasure to be able to talk to you for the first time at AUO. I would like to thank you and hope for your support going forward. I would like to first address these 2 questions. First up, about TV, notebook, monitor, smartphone, supply and demand this year. The shift toward larger sizes and better specifications persist. However, due to macro uncertainties, the end market demand was weaker. It is expected that area demand will continue to increase. But as new large generation capacities gradually come online oversupply continues. AUO will continue to be committed on high value-added and premium products to respond to the market challenges. TV panels have been the largest source of capacity utilization.

Now let's look at the TV sell-through in Q3. TV sell-through in Q3 was up by 2% -- 2 points Y-o-Y. With the promotions for large size and premium products, average size increased by more than 1 inch Y-o-Y, increasing to 45.8 inch. Now to look at more details at different markets. Let's first look at North America. Sell-through grew in Q3 spurred by promotions by brands and channels and with the strong seasonality, the growth will likely also occur. As for Western Europe, although sell-through growth was in the negative range, replacement demand continued to boost the sales through of large-sized segments. As for Mainland China, sell-through went into the negative range in Q3 in terms of growth with higher-than-normal inventory levels at channels. As for emerging markets, which have been performing relatively well this quarter, this year, actually, Eastern Europe and Latin America posted growth in Q3 in terms of sell through mainly boosted by demand from Russia and Brazil. All in all, there was growth in sell-through across the world in Q3. And looking ahead at the fourth quarter, brands in China will continue to focus on the large size and high-end products in -- for their sales promotions. Average size will likely to increase.

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [3]

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The next group of questions. The next question's about an update on the inventory levels of key applications. Frank, would you also take this question?

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [4]

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For TV. Because the end of year is a high season for many brands. The inventory level is slightly higher than normal. For IT products, brands have been building our panel inventories for a fear of the impact of U.S.-China trade tensions. And in preparation for the year-end sales season, inventory levels are higher than normal. For smartphones, brands have entered their sales season for new models in the second half. However, due to trade tensions, they have been more prudent in inventory control. Inventory levels across the value chain are quite normal at the moment. The third group of questions revolve around financial questions about loading rates. The loading rate in Q3 was more than 90%. The loading rate in Q4 will be adjusted downward, as we mentioned previously. For depreciation and amortization, the amount was TWD 8.9 billion in Q3. The amount for 2019 will be TWD 37 billion, similar to what we had projected last quarter. CapEx. CapEx in Q3 was TWD 7.4 billion. The amount for the first 3 quarters was TWD 23.6 billion. In response to market changes, we will execute and plan for CapEx very prudently. We currently expect the amount to be EUR 32 billion for the entire year of 2019. Next about currency fluctuations impact on our margins. In Q3, according to the official data, NTD weakened by 0.42% against USD and also weakened by 3.3% against the Japanese yen. These factors combined had a very small impact at about a positive 0.12% impact on our margin in Q3.

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [5]

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So those were our financial-related questions. The next group of questions are about AUO's key products and technologies. T.Y., would you please talk about TV, IT and non-commodity products, such as car displays.

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Tien-Yu Lin, AU Optronics Corp. - VP & GM of Mobile Solutions Business Group [6]

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Ladies and gentlemen, good afternoon. This is T.Y. I would like to quickly go over the progress we've made in our key products. In Q3, as macro uncertainties continued, customers have been less aggressive in panel purchasing. At the same time, panel prices have been lowered. In the face of market conditions, we have been improving our existing business and our performance and also prepared for long-term competition. Let me talk about our TV products. We continue to extend our presence in 75-, 85-inch ultra large-sized and 8K TV panel segments. In terms of 75- and 85-inch-size segments as TV screens continue to get bigger, our shipments in Q3 grew by more than 40% Y-o-Y. As for the high-definition 8K feature, we continue to ship 85-inch and 75-inch 8K TV panels.

Going forward, we would also work with our customers to work on new project development. We also hope and believe that 8K will be adopted by more brands, thereby boosting the growth of this segment. As for IT products, the shipment momentum of notebook panels have -- has been strong in Q3. This was partly because brands were stocking up on panels for the year-end holiday season. Also, some brands started to procure panels for fear of the increase in import tariff in the U.S. At the same time, the demand for monitor panels was relatively weaker recently. Let me talk about a few product lines of ours. First up about low-temp notebook panel. Our low-temp notebook panels were well received -- have been well received by commercial segments, and the shipment value in Q3 grew by more than 100% Y-o-Y. As for gaming, as the gaming market continues to expand, our gaming notebook panel shipments also doubled from the same period last year in Q3. Now to our non-commodity products, specifically, the Car Display segment. The car market has entered a downturn because of the macro conditions. However, our car display shipment remained to be quite steady. We continue to invest in the R&D of car displays. We are able to provide different features, including free-form cutting, multiple panel, full lamination and splicing as well as integrated touch. With our very reliable product quality and delivery, we have gained the trust of many customers. Besides, we expect the car display shipment to post double-digit growth Y-o-Y this year, and the growth extent is expected to be better than the rest of the market. Going forward, we will continue to collaborate with our customers to develop new applications and improve the competitiveness of our products. I would also like to stress that AUO continues to deepen the applications, chip and breadth. We are extending our TFT manufacturing capability to produce non display products such as medical x-ray sensors, and we have been mass-produced in such kind of sensor starting from the second half of this year. We will now start our question-and-answer session.

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Operator [7]

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(Operator Instructions) The first caller is Arthur Lai from Citigroup.

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [8]

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This is Arthur Lai from Citigroup. I have 2 questions. I think you mentioned that you had a unit growth of 2% in Q3 and the screen size was up by 1%. I just want to clarify if this is correct. Also, in previous years, when panel price grew, screen size also grew by 1 to 2 inches. How about in the future, say, if TV panel price was lower and is going to lower further. TV set price would also probably go down. The price elasticity is there. Will they also drive TV price to go up for next year? As for the next question that I have is about your new products. I think you mentioned that you have smartphone panels for under screen fingerprint application. Could you give us an update on the progress of product launches? And also let us know what you expect the penetration rate to be?

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [9]

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Arthur, this is Ben. I would like to first answer your first question. We mentioned that in Q3 our area growth grew by 3.3%. That was the area growth, although we had unit growth of various degrees across different segments. But if you look at the total area shipment growth, it was up by 3.3%.

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [10]

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Arthur, this is Frank. On your question about TV panel size migration and the impact on end sale prices. Currently, we think the effect has been positive in Q4 based on previous experience and the strategies of brands at the moment. Size upgrades will likely accelerate Q-o-Q in Q4.

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Tien-Yu Lin, AU Optronics Corp. - VP & GM of Mobile Solutions Business Group [11]

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Arthur, this is T.Y. About the question on the screen fingerprint sensor on smartphone panels, at the moment, integrating fingerprint feature in smartphone panels has been a defined trend for full-screen smartphones. We are leveraging long-term technology to incorporate fingerprint sensor. And we are collaborating with our customers to develop a new model. The sample will come out in Q4. As for the launch time line, it is something that has to depend on our customers' product portfolio and plans.

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [12]

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Okay. May I have an additional question? So you're using low-temp technology to integrate fingerprint sensor. To compare with OLED, how does that perform in terms of pricing or slimness or other features that are important to smartphone makers?

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [13]

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I think the biggest difference is that because we are integrating the functionality in our low-temp manufacturing process, whereas OLED has to add an additional sensor on the back of the panel. That is why we are able to achieve a large area of touch function and also a better integration to achieve a slimmer -- slimmer outlook, slimmer feature that's giving users better experience.

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Operator [14]

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The next caller is Sharon Shih from Morgan Stanley.

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Sharon Shih, Morgan Stanley, Research Division - Executive Director [15]

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This is Sharon from Morgan Stanley. I have 2 questions. First, Frank, could you let us know your key strategies and focuses going forward? Would it be on integrated solutions and the development of new applications? Do you have any thoughts for new product and application development at the moment? Secondly, you mentioned that 8K will be a key feature for viewers in the large-sized TV panel segment. When it comes to the design of 8K TV panels, have you encountered any manufacturing bottlenecks? Also in terms of 75-inch TV panels, what is the premium of 8K panel over 4K equivalence? Is the premium as high as 20% or 30%?

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [16]

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Sharon, this is Frank. Today marks the 51st day of me rejoining AUO. I am still trying to learn the ropes, although Paul said that I was here before 2013, but there's still much to learn for me, new things to learn about the industry. We've already talked about the opportunities and challenges, especially about the challenges. The industry is in a trough right now. But the most difficult time is usually the timing for transformation and adjusting operations. AUO has started several years ago to focus more on product innovation and value adding. And in Q3, we've already seen some results coming from these efforts. Our niche non-commodity products contributed more to our revenue in Q3. In terms of our product mix, we'll continue to stick with this strategy. We will focus on developing the high end and niche products to really take the best use of our advantages. In terms of niche, low volume, high variety and non-commodity segments, we will also leverage our technological advantages and the flexible management capability of ours to perform better. In terms of our operation, we have been very strong in our debt management and operational management. Going forward, we will strengthen our smart manufacturing and cash flow management capabilities. In response to the trend of AI and IoT, market applications will be more diverse that display industry will not just focus on consumer products, but also will have to accommodate a wide variety of industry applications. That is why in terms of technological innovation and open innovation, we'll have to work with our supply chain partners. Besides offering capacity and cost advantage, we also need to engage supply chain partners and to work on hardware and software integration to create more values. This also echoes what we have said about leveraging our advantages to develop the fuel economy opportunities.

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [17]

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T.Y., could you answer the question about 8K?

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Tien-Yu Lin, AU Optronics Corp. - VP & GM of Mobile Solutions Business Group [18]

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Sharon, this is T.Y. 8K as a feature, is gaining popularity among large-sized TV sets, helping to improve picture quality and the positions of brands. In terms of manufacturing, at the moment, the biggest problem still relies -- still has to do with the production yield rate. During the process of introducing new products, the supply chain and ecosystem both have to tackle these kind of issues. The increase in high-end application is a good thing for us. It's good news. It's going to benefit the industry. Also, next year, the Tokyo Olympics will also have broadcasting in 8K. So we expect 8K as a format will continue to grow because 8K is defined as a high-end feature for television sets. Some customers even position 8K as a higher feature than OLED television sets. So if we want to take into consideration of the production costs and brand's positioning, 8K TV sets do have some premium.

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Fu-Jen Ko, AU Optronics Corp. - President, COO & Director [19]

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Sharon, I would like to make a few points. We think that from now to next year, 8K will continue to be a flagship feature of brands. But if you want to look at the cost, it has to do with the -- not just the panel cost, but also this cosset and IT supply investments, and 8K has been around for several years. And if we are to compare the average 4K TV price to 8K, I think 8K probably carries a 100 premium over -- a 100% premium over 4K. But if you are comparing a high-end 8K model against a high-end 4K model, the premium is not as much.

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Operator [20]

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Ladies and gentlemen, in the interest of time, we will take one last call. The last caller is Jerry Su from Crédit Suisse.

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Jerry Su, Crédit Suisse AG, Research Division - Director [21]

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My first question is about the oversupply situation. You said that the inventory levels tend to be higher at the moment and you will lower your utilization rate. I think some of your peers are working on capacity restructuring, including options such as shutting down the entire production lines. I wonder if you could give us some color around this? Second question is about the inventory levels of TV and IT products. You mentioned that the levels are like -- slightly higher at the moment. Could you let us know when do you -- when you expect that the inventory levels to be digested clearly. Otherwise, you may just lower your UT rates, but the inventory levels may still take a toll on your operation.

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [22]

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Jerry, this is Paul. I think every company has its own strategy when it comes to the adjustment of production line and capacity. We also just read the news about the policies and changes to be made at our competitors. I think when the market changes, it is very normal for companies to do dynamic adjustments. Actually, what worries us most is the build-up of inventories because that would mean that the market is not healthy. But I think at the moment, companies are generally more prudent and cautious about such kind of situation. In terms of the end market, because the year-end holiday season is coming up, the inventory levels are higher, but still within a controllable range. Within the digestion of the inventories may happen and resume to normal state after the conclusion of the sales peak season.

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Operator [23]

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Ladies and gentlemen, this concludes our earnings call. If you have any further questions, please feel free to contact us at the IR Department of AUO.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]