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Edited Transcript of 2409.TW earnings conference call or presentation 6-Feb-20 6:00am GMT

Q4 2019 AU Optronics Corp Earnings Call

Hsin-Chu Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of AU Optronics Corp earnings conference call or presentation Thursday, February 6, 2020 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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* Brad Lin

BofA Merrill Lynch, Research Division - Research Analyst

* Jerry Su

Crédit Suisse AG, Research Division - 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 Fourth Quarter Results Conference Call. (Operator Instructions)

Now let's welcome 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 of AUO's IR Department. On behalf of the company, I would like to welcome you to participate in our Q4 results conference call. Joining me here are 4 executives: Mr. Paul Peng, Chairman and CEO; Mr. Frank Ko, President and COO; Mr. T.Y. Lin, VP of Business Group; and Mr. Benjamin Tseng, our CFO.

The agenda of today is as follows. First of all, Paul -- rather, Ben will go over Q4 results and provide you with our Q1 outlook. And Paul, our Chairman, will share with you our outlook for 2020 and our business updates. Afterwards, we will proceed with Q&As. For the first part, we will address the questions that we already collected from analysts. Afterwards, if you have more questions, we will open the floor for you to call in.

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 #2.

Now let's welcome Ben.

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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 fourth quarter results. During the quarter, due to capacity ramps of new large generation fabs in China and slower seasonal demand for some products, large-sized panel ASP reductions as well as a 6.6% drop in area shipment, net sales came in at TWD 62 billion. And profits also saw a greater impact. Gross loss was $1.5 billion. OP loss was $6.5 billion. We had a nonop expense of $1.4 billion due to a $2.3 billion impairment of solar asset related -- solar-related assets. Net profit attributable to owners of our company was negative $8.8 billion. Operating profit and D&A margin was 4.2%. The EBITDA margin of the Display segment was 4.4%.

Next slide, full year results. Net sales came in at $268.8 billion, down by $38.8 billion Y-o-Y due to lower ASPs, especially the panel price declines of TV panels. Gross profit was $4.5 billion (sic) [$0.456 billion]. OP loss was $20.5 billion. Net profit attributable to owners of the company was negative $19.2 billion. Loss per share was TWD 2. OP profit plus D&A was 8 -- $15.8 billion. EBITDA margin was 5.9%.

Next slide, balance sheet. At the end of Q4, cash was $80.5 billion, up by $9.3 billion Q-o-Q. Debt was $113.7 billion, up by $6 billion Q-o-Q. Gearing ratio was 17.7%. Inventory turnover was 35 days. These 2 metrics were maintained at very healthy status.

Next slide, cash flow. In Q4, we generated nearly TWD 9.9 billion from operating activities. CapEx lowered to $6 billion. We had an inflow from financing activities of $5.5 billion, mainly due to an increase in borrowings.

Next slide, revenue breakdown by application. The revenues of our Display business went down by 12% Q-o-Q. However, the respective share of each application segment remained the same across the board. In terms of product mix, car displays share and smartphone panel shipments increased.

Next slide, revenue breakdown by size. 50-inch and above panels share gain by 1 percentage points to 22%, thanks to increases in the shipment of 85-inch panels. 10-inch to 20-inch segment lost 2 percentage points to 33% due to increased notebook panel shipment in Q3, thus causing the share to lower in Q4. 10-inch and below segment lost again 1 percentage points to 22% (sic) [21%] with increased contribution from smartphone, car and tablet panels.

Next slide, shipments and ASP by area. Area shipments decreased by 6.6% Q-o-Q. ASP per square meter went down by 4.5% Q-o-Q.

Next slide, small and medium-sized panels. Area shipment increased by 12.9% Q-o-Q. However, due to slower seasonal demand, the shipments of industrial displays, gaming and entertainment displays decreased. Thus, the revenues of these small and medium-sized panels decreased by 6% Q-o-Q.

About our guidance for Q1, one thing to note is that we haven't been able to fully factor in the impact from Wuhan coronavirus, so these impacts may not be reflected in the forecast. For the large panels, shipments are expected to be down by mid-single-digit percentage points Q-o-Q. ASP is expected to be up by mid-single-digit percentage Q-o-Q. For small and medium-sized panels, we expect shipments to be down by mid-teens digit percentage points Q-o-Q. For the loading rates in Q1, we will adjust the loading rates dynamically based on market conditions. But at the moment, we will expect the loading rates to be slightly higher than those of Q4.

So this was an update on our Q4 results and the guidance for Q1. Before we proceed with question and answers, we would have Paul to give you an opening remark.

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

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Good afternoon, ladies and gentlemen. 2019 was a very challenging year. Demand was weaker in several segments including television, smartphones. Even car sales went down, with demand weakening. Making things worse, there were capacity ramps from China. So oversupply was very severe. The panel industry went through very, very strong headwinds. Panel ASPs went down significantly. Our revenue took a hit. The revenue went down by 12-plus percent. Profits also declined considerably. We posted the first annual loss for the first time since 2013.

Despite the headwinds, we took the opportunity to improve our asset health. Of our loss, some more than TWD 2 billion were associated with the impairment of idle solar-related assets and a drop in deferred tax assets. These assets combined amounted to some more than TWD 3 billion, and they are -- were associated with impairment of nonperforming assets. They have nothing to do with our cash flow performance, but they can help us to make our future assets healthier.

Starting from Q4, some signs of recovery have emerged. These signs came from several aspects. First of all, some panel industry players shut their plants or converted their production lines. Some even suspended their investment plans. Secondly, the trade wars, especially the wars between China and U.S., are going through some -- are showing some signs of abating. And most importantly, the end-market demand in Q4 was better than expected. Sales was also better than [expected]. So the inventory levels in channels were lower than expected.

Over the past 2 years, some panel prices started to rebound. Some Korean peers have announced plans to stop production or reduce their production. This may help to stabilize supply and demand, but there will continue to be some new capacity ramps from Chinese vendor panel makers, although we still have to observe how fast they can start production or how well they can start to provide their products.

Over the past 1 year and more, although there was some easing of regional trade conflicts, their subsequent changes remains something that need to be observed. Right now, the standoff between China and U.S. in the trade sphere has already become a new norm. So we have to continue to observe the impact for the global economy.

But on the positive side, there will be the Euro Cup and Tokyo Olympics. They could help boost consumer demand. For the mid to long term, the panel industry will likely still go through a period of oversupply. Short-term adjustment may not help resolve the oversupply situation. Some commodity products are still seeing very stringent oversupply.

AU has been working on value transformation for the past 2 years, and we remain committed to this strategy. Our direction, our strategy will not change just because they were -- there are some short-term fluctuations.

I think the media and analysts as well as all the investors may be very interested and concerned about the impact of novel coronavirus. AU has plants in Suzhou, Kunshan and Xiamen. We don't have plants in Hubei or Wuhan. And during the Chinese New Year holiday, we continued with our operation and production. We did not suspend operations, so there was no problem for us to resume operation or production. However, after the Chinese New Year holiday, the epidemic started to spread. The Chinese government has announced to extend the Chinese New Year holiday and to delay the timing for production resumption. There were also some curbs on transportation and logistics, so the industry chain was affected significantly. Raw material and product production or sales would also take a hit.

As for AUO, we continue with our production, but if the epidemic cannot be contained or controlled very quickly, the dynamics with material or transportation could play havoc to our results going forward. Today, many fabs are still lying idle. They are -- they haven't started operation yet. And in China, most of the -- some provinces and cities won't start work until next Monday. So as far as how big the impact will be, it is something that we need to observe. Although we try to factor into -- the impact in our Q1 forecast, we may not be able to reflect the full impact at the moment. If there's any decision or any new information coming in, we will let you know as soon as possible.

But as you know, we have contingency in place -- contingency plans. After the outbreak of the epidemic, we have [set up] some precautionary measures at our China fabs, and these measures are more stringent than what was required by the Chinese government. And we continue to have a tight grasp of the situation internally and externally. At the moment, there was no case -- there were no cases of confirmed diagnosis here within AUO, and we also are demanding our employees to conduct self-imposed quarantines and self-health management. We are also limiting business travels for our employees. And of course, we hope that the epidemic can be controlled very quickly to minimize the impact on the economy.

Here, I have some slides that I would like to share with you about our value transformation. We have been working on 3 aspects: to improve our financial structure, to upgrade our values and also to work on technological innovation. During the process, we continue to differentiate our products and to deepen our technology depth to create profitability for our core business in the panel manufacturing and energy. We are also working on increasing the value adds for our products. And we are making an entry into field economy as well as extend our footprint in services, systems and solutions.

As you can see on the chart, this is our business structure at the moment. Let me explain next slide. It is clear, the orange part is the panel business, panel and panel plus. And our hope is to expand the red portion, which is the premium products. The hope is to maximize value, the unit value of the displays that we provide.

How do we do it? We want to take advantage of our technology and also our management capability to provide values for the customers and ourselves. Also, we want to achieve product differentiation. For example, we have 8K TV panels, gaming notebook panels and monitors, mini-LED backlight products, and more recently, ultra-narrow bezel TV displays. These are our strengths because it requires a different set of management abilities and field applications for different products.

So we actually differentiated internally 2 types of management models. First of all, for commodity products including TV, IT and smartphone products, we leverage our technological ability to achieve differentiation. Also, the other part is noncommodity, which is our focus for the past few years. These are the nonconsumer products, including car displays, industrial displays, PIDs and wearable displays. These are customizable, low-volume, high-variety segments.

We have been placing a sharp focus on noncommodity segments. The new applications of this segment includes 5G, IoT, AI-related applications, smart retail, smart health care, smart transformation, smart home, manufacturing and autonomous vehicles. Each of these areas requires different kinds of display technologies and -- requires different kinds of technology, and displays remain to be the common interface for them all.

With commodity or noncommodity products, our hope is the same. We want to achieve competitive in terms of competitiveness in our cost structure so as to maximize our differentiation, and the ultimate goal is to maximize our profits.

So that was about our panel business. The other part of our core business is energy, and this set of business has gone through some very difficult time in the past. But after the consolidation in the past 1 to 2 years, and we have made some impairment of nonperforming assets in the past, and we believe the structure will improve significantly going forward. We have been really good at maximizing product values. And we are also using our application and software advantages in the solar business. Our hope is to provide highly dependable, high-quality solar PV solutions, including highly efficient solar modules, total solutions and energy management platforms in hopes of providing more values to our partners.

In 2019, we saw a great volume growth in EPC. And we had gained the recognition of several large vendors in Taiwan, including Yuen Foong Yu and Chi Mei. They have adopted our technologies, be it rooftop- or ground-mounted solar PV modules. And we believe the pace of this business will continue to grow. We have the core businesses in panel and energy. We have to stand firm and continue to expand our footprint as well as create more values.

And on the next page, you can see there's a green part. In 2019, we announced our plans to make a foray into the field economy. Our goal is to become a solution provider for different kinds of field applications. Several aspects are included here.

First is about new business. For this part, we leverage our advantages built over the past years to expand into upstream and downstream software/hardware integrated service to provide solutions. For more than a year, we have been extending our footprint in smart retail, health care, circular economy and smart manufacturing services, and we have seen some results showing.

In terms of smart retail, for example, we have Space4Money. In the U.S., we have ComQi. And recently, we have acquired JohnRyan through ComQi in hopes of deepening and broadening our presence in smart retailing. JohnRyan is an American company that was just acquired by ComQi, and ComQi has a 100% stake in the -- in JohnRyan at the moment. JohnRyan is a banking content delivery service platform. ComQi is a content delivery service for smart retail and smart stores. What we're doing now is that we are leveraging Space4Money to bring the solutions in the U.S. to Taiwan and the rest of Asia.

So in terms of circular economy, we have U-Fresh, which is leveraging the experience in wastewater discharge in the past to help large manufacturers to improve their wastewater management. With smart industrial service, we have Mega Sight (sic) [Mega Insight] and Edgetech using our own experience and expertise to help customers to deploy AI and smart transformation projects.

Also yesterday, we announced that we will seek to obtain 5% to 30% of shares of ADLINK on the open market in a move to build strategic partnership with ADLINK. We also want to leverage ADLINK's expertise in industrial computers and computing algorithms to further advance our software and hardware integrated services.

And with health care, we have AUO Care. Through this company, we are applying our ERP smart information system experience to combine and create more solutions for the online and health technologies.

In addition, we have been working on reorganizing our business. We have set up business systems and solutions business last year. This unit was formed by our system group, which was led by a group of seasoned executives working with our display manufacturing team. They are trying to provide solutions leveraging both softwares and hardware expertise, and they will focus on building more applications for the field to provide some very integrated solutions.

We already have some very deep experience in product integration. We have touch functionality. We have lamination, free-form and system assembly experience. And right now, we are more capable of extending our display manufacturing experience to provide high-end systems.

As we seek to transform, field economy is of great importance to AUO. This new business unit and the strategic partners that we acquire through acquisition as well as the systems and solution business are all signs of our determination to implement transformation. While we still need some time to achieve the right scale, but we believe we are on the right track. And we keep an open mind, and we would like to welcome more strategic partners to join us.

The past year was a very difficult year for the panel industry, although market conditions became warmer recently, but we still have to watch closely any changes in the market. We have accumulated great expertise in R&D and technological innovation as well as having a very healthy financial structure. Today, we are integrating these capabilities to execute our value transformation strategy. We look forward to seeing these efforts paying off in the next few years and hope that we can make AUO one of the leaders that break away from the oversupply situation.

Although the Chinese New Year have already arrived, but to Chinese people, it is still the start of the year. Although we are going through some epidemic alarms at the moment, we still have great expectations for this year. And we hope that this year will be the year that we outperform ourselves than the past years. Thank you.

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Questions and Answers

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Julia Chao, AU Optronics Corp. - Head of IR Department [1]

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Thank you, Paul. We will start with our question-and-answer session. We will first address the questions that we already collected from analysts.

The first group of questions are about market updates and outlook. The first question is about 2020 worldwide panel supply and demand. The second question is about TV sell-through in Q4 and demand outlook in Q1. Frank, would you please address these 2 questions?

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

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I would like to respond to these 2 questions. First off, about H1, the 2020 supply and demand worldwide. In the second half of 2019, the market was under pressure amid trade tensions. But in Q4 last year, festival sales was quite strong, and demand was better than expected. The trend towards screen size and specification upgrades remained the same across various applications. Although there will be capacity ramps from new large generation fabs this year, we expect that sports events will continue to boost replacement and demand.

AUO has very unique technology and strengths in consumer and industrial aspects. We will continue to stick with value transformation to respond to market challenges. We hope, by doing so, we will be able to meet the requirements of the customers and improve our competitiveness.

As for sell-through in Q4, my colleague just told me that the results were very strong, but we will take a closer look. The Q4 sell-through was up by 2% Y-o-Y, which was better than expected. In developed markets, especially due to strong seasonality and promotions, the market was growing nicely. And average size also increased by more than 1.5 inches Y-o-Y.

In North America, sell-through grew Q-o-Q in the fourth quarter boosted by large-screen TV promotions. Average size grew by more than 1.5 inches, and the shares of 65-, 75- and 85-inch products also gained shares. In Western Europe, although sell-through slipped Q-on-Q, but the performance was still better than expected. 55-inch and 65-inch products sell-through shares also grew Y-o-Y.

In Mainland China, sell-through grew in Q4. In the Double Eleven Festival, online promotions were quite strong, boosting the sales of Q4. And the 65-inch segment share reached 20% in online sales. In emerging markets, Eastern Europe posted double-digit percentage growth in Q4, mainly boosted by stable demand from Russia. Emerging Asia had lackluster performance. The sell-through slipped Q-o-Q mainly because of less-than-expected demand from India, but average size still grew by more than 2 inches.

Overall, Q4 TV sell-through was better than expected worldwide. And the main growth regions were North America, Mainland China and Eastern Europe. Inventory levels went down to healthier levels as a result. Looking ahead the first quarter of this year, brands and channels will continue to stockpile on large-sized and high-end products. It is expected that average size will continue to grow as well.

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Julia Chao, AU Optronics Corp. - Head of IR Department [3]

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Thank you, Frank. The next question is about the inventory levels for TV sets, monitors, notebooks and smartphones. Frank, please also answer this question.

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

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As we've just shared that in the end of 2019, TV sell-through was quite strong, so the overall inventory levels were quite healthy at the moment. As for monitors, in the second half of last year, monitor brands and makers stockpiled their inventories over concerns of U.S. and China trade tensions. Inventory levels were higher than normal for notebooks due to strong sales in Europe and U.S. during the high year-end season. Inventory levels went down. However, in China due to the Chinese New Year holiday, inventory levels went up slightly.

For smartphone, brands remained in conservative stance in the end of last year in terms of their inventory stockpiling activities due to concerns of the transition between 4G and 5G. They will enter a slow seasonality in Q1. So the inventory building up was less aggressive, bringing the overall inventory levels back to normal.

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Julia Chao, AU Optronics Corp. - Head of IR Department [5]

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The next group of questions are financial ones. First of all about UT rates. The UT rates in Q4 were close to 90%. For Q1, we will dynamically adjust our UT rates based on market conditions. For depreciation and amortization, the amount in Q4 was TWD 9.1 billion. The amount for the full year of 2019 was $36.3 billion. We expect the amount to be $36 billion in 2020.

CapEx, the amount in Q4 was $6 billion. For 2019, the full year, the amount was TWD 29.5 billion. As for Q1 this year, we will prudently plan for CapEx based on market conditions. And at the moment, we expect the amount to be TWD 20 billion. For currencies impact on our margins, in Q4, based on official data, NTD strengthened about 2 percentage points against USD, and we also strengthened about 3.2% against the Japanese yen. These factors combined had an unfavorable 0.5 percentage points impact on our margin.

These are financial-related questions. For the next group of questions, we have questions mainly revolving around AUO's key products and technologies. We will have T.Y. to talk about our TV, IT, nonconsumer products such as medical, PID displays.

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

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This is T.Y. I would like to briefly talk about some of our plans for our products. For this year, TV will likely remain the trend toward larger sizes and higher resolutions. AUO will continue to focus on 8K and 75-, 85-inch TV panels.

In terms of 8K, thanks to 8K signal broadcasting in Tokyo Olympics, major brands are offering 8K TV sets. The sales volume of 8K TVs will likely surge this year. In 2019, AUO launched 85-inch, 75-inch 8K TV panels, and we will provide 65-inch products as well this year.

As for 75- and 85-inch TV sets, brands have been conducting very aggressive promotions. This helps -- this has helped to accelerate the size upgrades for television sets. It is expected that for 2020, 75-inch and above TV set sales will grow significantly Y-o-Y. In 2019, AUO's 75- and 85-inch TV panel shipments grew by about 50% from a year ago, and we expect the growth to continue this year.

For IT products, we are focusing on curved monitor panels and low-temp notebook panels, and these products have gained very good customer reviews. As for curved monitor panels, these kind of panels are featured by wide-viewing area, reduced eye strain and immersive experience. Also aided by very aggressive promotions by branded customers, AUO saw a double-digit percentage growth in shipments in 2019 Y-o-Y. This year, we expect shipments volume to maintain a double-digit growth, which will be better than the market average.

As for notebook panels, in response to the growing trend of high-end commercial notebooks, AUO is using low-temp technology to provide notebook panels which are characterized by 4K resolution, narrow bezels and ultra-low power consumption. These products are able to provide greater mobility and portability. As a result, they have become top choice for commercial notebook products. In 2019, AUO's low-temp notebook panel shipment doubled from a year ago, and we expect the shipment to continue to grow this year. Low-temp notebook panel will likely account for more than 10% of the notebook panel shipment of AUO.

For mini LED, AU has been expanding our footprint in the mini LED technology road map. We have mass-produced 32-inch and 27-inch mini LED backlight, high-end monitor panels. And we are also upgrading the specifications of these products to fit the gaming requirements. We have also, in the beginning of this year, ramped the production of 17.3-inch 4K mini LED notebook panels.

As for nonconsumer products, in line with our value transformation strategy, we have seen our efforts come to fruition in some of our niche products, for example, medical panels and PIDs. Let me talk about medical displays first.

The demand for medical device equipment is improving steadily around the world. AU has a very comprehensive product line, and we also are able to provide high resolution, wide color gamut and ultra-high contrast features. In 2019, the shipment volume of our medical displays doubled from a year ago. And for this year, we will continue to expand our footprint, and we expect the extent of growth of our shipment will be better than the market.

As for PIDs, under the trend of smart retail and smart transportation, we launched TARTAN display technology in 2019, which is capable of customized low-volume and high-variety manufacturing. And TARTAN can be applied extensively in various settings to meet the demand for customers for some very special format of displays. Boosted by new technology and software/hardware integrated services, we expect our PID shipment volume to be better than the market, extending the growth momentum that we have achieved in 2019.

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Julia Chao, AU Optronics Corp. - Head of IR Department [7]

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Ladies and gentlemen, we now open the floor for you to call in. (Operator Instructions) Thank you.

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Operator [8]

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(Operator Instructions) The first caller is [Claire] of CLSA.

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Unidentified Analyst, [9]

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Can you hear me?

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Operator [10]

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Yes, very clearly.

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Unidentified Analyst, [11]

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Chairman and executives, this is [Claire] from CLSA. I would like to just have a clarification on your guidance. You mentioned that for large-sized panels, you expect the shipments to be down by -- or up by mid-single-digit percentage points in Q1 -- decline. Okay, it will be down. You also mentioned that you expect your UT rates to be slightly higher than Q4 levels. Could you let us know why the gap?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [12]

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[Claire], this is Paul. With our manufacturing process, we actually start with the glass process and all the way throughout the process. The decline in shipments in Q1 was partly because of a lower-than-usual UT rates in Q4. The projection for higher loading rates in Q1 was because that we project that demand will likely increase. There is a gap in time.

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Unidentified Analyst, [13]

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Okay. My second question is about the spread of the coronavirus. Since you have fabs in Mainland China, and you said that you continue with your operation in Chinese New Year holiday, could you let us know about the logistics? I think you have already made some preparations in terms of those inventories. But in terms of Chinese New Year holiday, do you usually keep a higher-than-normal inventory levels? Would it be more than what you usually have? Will you encounter any issues with materials after the Chinese New Year holiday?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [14]

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Usually, before the start of the Chinese New Year holiday, we prepare more for inventory. So the levels are usually higher than normal a little bit. This is so because we want to ensure that we can maintain normal production during the 1 to 2 weeks of the Chinese New Year holiday. But right now, we are seeing 2 challenges coming up. One is that some suppliers are -- did not operate during the Chinese New Year holiday, and their operation will be affected by the timing of work resumption. Actually, there are 3 issues here because the second issue is that our customers have yet to restart their operation. We, at the moment, we do not know how they will be able to handle this situation right now.

And the third issue is that we are not certain about the logistics and the resumption of work of employees across various factories because there are some transportation limitations at the moment and some provinces or regions impose self-imposed quarantine principles for people there. In addition, some local governments also are imposing very stringent curbs on transportation, logistics will take a hit. So it takes much longer time for inland transport. That is why we think that the industry will have to observe closely about the changes going forward.

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Unidentified Analyst, [15]

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Do you think the logistic cost would increase as a result?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [16]

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At the moment, the effect has not been reflected in the operations. But after all the factories resume operation, I think some assessment will have to be done.

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Unidentified Analyst, [17]

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Okay. My last question is could you talk about TV panel price trends? Before the outbreak of the epidemic, I think there was some market sentiment that was quite positive. At the moment, some people are saying that companies will scramble to book panel allocations, and there will be some impact on panel pricing. Do you think -- do you have any idea about the upward trend for TV panel pricing? How long do you expect the trend to continue?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [18]

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I think because prices are determined by supply and demand, in the second half last year, supply and demand were quite imbalanced. The industry has made a lot of production capacity adjustments, so supply was lower. And also, Q4 demand was better than expected. Indeed, this will have some positive impact on panel prices in the future. As for how long the upward trend will sustain, I don't think we can comment on our own. But we will have to pay close attention to the impact of the outbreak. We cannot be sure of the impact. Whether it's positive or negative, it is something that we cannot know at the moment. But ultimately the pricing will be determined by the growth momentum and demand as well as market conditions. And I think the market will decide how the pricing goes.

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Operator [19]

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The next caller is Jerry Su from Crédit Suisse.

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Jerry Su, Crédit Suisse AG, Research Division - Director [20]

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My first question is about your CapEx. You said that it will probably be TWD 20 billion. I think this will be the first time for the past few years that you returned back to such a level. Could you let us know what the $20 billion will cover? The second question is about wearable applications. With wearables, especially with flexible OLED, could you let us know about your capacity? Do you have any plans for capacity expansion?

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Benjamin Tseng, AU Optronics Corp. - CFO, CAO & VP [21]

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Jerry, this is Ben. On Capex, for the past several years, we worked on expanding our capacity. And we had installed Gen 6 fab in Kunshan and expanded the line in the Gen 8.5 fab in Taiwan. We have already made the expenses last year, hence, the drastic drop of CapEx in 2020 compared to the previous 2 years. Basically, as a company, we need to have good maintenance and upgrading and photo-masking processes. These are the required expenses. As far as the CapEx that we have budgeted at the moment, I think we've made good allocation for supporting our operations. If there's any new project coming up that require additional investment, then we will let you know as soon as possible.

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

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Jerry, this is Paul. I would like to add a few information. The budgeted $20 billion CapEx will be mostly used to support our new product development, technological upgrades and production line upgrades because we will not add capacity at the moment, so most of the budget will be spent in these aspects. As for flexible OLED, we have the capability to do mass production. And we have accumulated our expertise for quite some period of time. But we feel that flexible and foldable OLED are still in an initial stage in terms of market acceptance and cost structure. More optimization is needed. At least for the moment, we do not have CapEx plans for these things.

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Operator [23]

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Our next caller is Arthur Lai from Citigroup.

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Yu Jang Lai, Citigroup Inc, Research Division - Director & Analyst [24]

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Paul, Ben, executives, this is Arthur Lai from Citigroup. I have a question about your strategy. You announced your plan to make an acquisition of the stakes of ADLINK. If you managed to acquire a stake, what would you expect this will have an impact on your plan to become an IoT solution provider? Do you seek to acquire some control of the operations of ADLINK, or if there's any opportunity for you to further extend your advantage?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [25]

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Yes, Arthur, we are a long-term business partner with ADLINK. We think that ADLINK is very strong in industrial and commercial systems as well as its computing and channel portfolios. Their strength can complement AUO's display technologies in our road map. In fact, as I have told you all that AU has been working on systems and solutions for the past 2 years. And when it comes to the ecosystem and industry chain, we hope to deepen and broaden our partnership with ADLINK to reinforce our positioning in the ecosystem. In addition, we can also leverage ADLINK's strength to help us provide a better service to our existing customers.

Over the past few years, we have been working on commercial and industrial displays, and in fact, these displays account for 26% of our display revenues. We have built a very strong customer base. Many of our customers are asking us to provide more comprehensive services. As a business partner of AUO or a strategic partner of us, ADLINK could help us enhance our service capabilities. We plan to own a stake of 5% to 30% of ADLINK. How much it will be, it depends on the purchase of their shares. But our main hope is that through capital investment, we can deepen and broaden the partnership. As for whether there will be more strategic collaboration going forward, I think we will have to make more assessment. But at the very least, the investment plan this time is something that both companies hope to achieve to improve the values and our strategic partnership.

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Operator [26]

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(Operator Instructions) The last caller is Brad Lin of Merrill Lynch.

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Brad Lin, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Paul, Frank, T.Y. and Ben, I have 2 questions. For the past few years, I think you have been shifting towards asset-light business model. You have been streamlining your CapEx, and based on your Q4 results, I think you have collected some cash back for your working capital. And this time around, you will spend some TWD 3 billion-plus in the acquisition of the stakes of ADLINK. Since that I think you will still have assets, cash, does that mean that you will consider making some more investments in the future? If so, does that mean that panel business has changed in dynamics? Because in the past, you would seek to prepare more cash for lower season, but right now, you are making new investments. So does that mean that downturn of the panel business will be shorter than we imagined?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [28]

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Brad, this is Paul. I think AU has been focusing on value transformation for several years. This -- we are doing this because we want to make use of capital investments to provide the unit values of our existing investments. With capacity ramps from Mainland China or the additional new generation fabs coming up online, we have observed that the capital structure of these new fabs are very different from what we already have or understood. So the slide of unit price of new panel investment has been decreasing very fast, and the payback time for new products have extended quite significantly.

As a company, we will need to consider ROE for our investors. We think the time for making large-scale capacity ramps has gone. Unless there's a sharp turn in the market conditions, we will probably not make any large expansion plans. What we will do instead is continue to improve our capabilities and our technologies. At the moment, we are in the leading pack in terms of technological innovation. And we have been very versatile in leveraging our existing capacities to make various applications. Although the low-volume, high-variety segment is a very, very challenging sector, but it is more reliable, more confirmed to some extent because you need to have long-term partnerships to operate in this segment. So yes indeed, we will go for asset-light business model because depending on high-asset investment to operate in the panel industry does not work anymore.

For the past few years, we have been working on optimizing our assets. We improved the asset health of our company, and we are having a very healthy financial structure. We did so because we want to support new ventures in field economies and solutions and system applications. The investment in ADLINK that we announced yesterday was one of the larger investment projects that we have in recent years. The earlier acquisitions of ComQi and JohnRyan are of smaller scales. Meanwhile, we have made some investments in new businesses and have obtained 100% stake in these companies.

Going forward, some of our resources will be allocated to the new businesses, including software and hardware integrated systems and services. We look forward to having quick improvements in these areas. And in the process, we will not work alone because the domain knowledge required to be successful is very different from what we have and what we have built up in the past. So we will have to leverage the expertise and management capabilities of our partners. That is why I said earlier that we will keep an open mind to welcome more partnerships. And we do not have a fixed model for the type of partnership that we want to have. What we look for is an increase in the strategic value and also an increase in the synergy for our partners. These will be the focuses that we will be committing ourself to.

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Brad Lin, BofA Merrill Lynch, Research Division - Research Analyst [29]

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My second question is about your commercial and other segment. I think this segment has gained share over the past few years. If we want to have a breakdown of your revenue, can you tell us about the contribution of your modules or systems or the -- and the software and hardware integrated segment? Are they already making some positive contribution to your gross profit or operating profit?

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Shuang-Lang Peng, AU Optronics Corp. - Chairman & CEO [30]

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We made these plans quite concretely last year because it really takes some time for us to grow new businesses. We expect they -- to start to make contribution to our revenue this year, but the contribution will not be that big. The real contribution will emerge in the second half of this year or 2021. But when they start to make contribution to our revenue as these are light asset investments, we expect better profits from them.

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Julia Chao, AU Optronics Corp. - Head of IR Department [31]

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Ladies and gentlemen, due to time constraints, this concludes our earnings call. If you have any other questions, please feel free to contact us at AUO's IR department. Thank you.

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