AUOTY - AUO Corporation (AUOTY) Q1 2023 Earnings Call Transcript

2023-04-28 21:17:05 ET

AUO Corporation (AUOTY)

Q1 2023 Results Conference Call

April 27, 2023 02:00 AM ET

Company Participants

Julia Chao - IR

Paul Peng - Chairman and Group Chief Strategy Officer

Frank Ko - CEO and President

James Chen - Senior VP of Display Strategy Business

Ben Tseng - CFO

Conference Call Participants

Jerry Su - Credit Suisse

Lisa Chen - Yuanta Securities

Presentation

Operator

Welcome to AU Optronics 2023 First Quarter Financial Results. Before the meeting starts, all lines are being placed on mute. After the presentations by the management team, there will be Q&A session. Now, I would like to hand over to Ms. Julia Chao, AUO's IR Officer.

Julia Chao

Thank you, ladies and gentlemen. Good afternoon. I'm Julia Chao, AUO's IR Officer. On behalf of the company, I would like to welcome you to participate in our first quarter results conference. I'm joined by four executives: Mr. Paul Peng, Chairman and Group's Chief Strategy Officer; Mr. Frank Ko, CEO and President; Mr. James Chen, Senior VP of the Display Strategy Business; and Ben Tseng, our CFO. The agenda of today is as follows. First of all, Ben, our CFO, will go over our Q1 results and provide you with our guidance for Q2. Then, our Chairman, Paul, will have an opening remark. Afterwards, we will proceed with questions and answers. We have collected questions from analysts before the meeting. Our speakers will address these questions in the first part of the session. Then if you still have questions, we will open the line for you to pose more questions. Now before I hand over to Ben, I would like to remind you that all forward-looking statements contain risks and uncertainties. Please spend some time to read the Safe Harbor notice on Slide number 2. Ben, please.

Ben Tseng

Good afternoon. I would like to briefly go over our first quarter results. In Q1, Display ASPs per square meter increased by 3% Q-o-Q. However, due to fewer working days during the Lunar New Year holidays and weaker commercial application demand, area shipment decreased by 1% Q-o-Q. Our performance was also negatively affected by NTD appreciation and solar PV module shipment declines, resulting in a Q-o-Q drop in our results. Net sales came in at NT$51.2 billion down by 2.8% Q-o-Q. Gross loss was NT$4.9 billion, OP loss NT$11.1 billion, net loss attributable to owners of the company was NT$10.9 billion, EBITDA margin was negative 6.8%. Next Slide. Balance sheet. At the end of Q1, cash and cash equivalents was NT$77.1 billion. Debt, long term and short term debt combined was NT$103. 2 billion up by NT$16.3 billion Q-o-Q. Gearing ratio increased to 14.9%. Inventory was NT$28.5 billion, down by NT$1.7 billion Q-o-Q. Inventory turnover was maintained at 48 days. Cash flow. We had outflow from operating activities of NT$10.1 billion in Q1. CapEx was NT$11.7 billion. Net change in debt was NT$16.3 billion.

Next Slide. Revenue breakdown. Q-o-Q wise, there was little change across the product categories on the back of steadily improving ASPs and product mix optimization, TV and monitor each gained 1 percentage point. Mobile PC and device share lost 1 percentage point to 23%, mainly due to the slower notebook business amid lower area shipments. Next Slide. Shipments in ASP by area. As mentioned, area shipments slightly went down by 1% Q-o-Q. ASP increased by 3% Q-o-Q. Now about our Q2 guidance. Based on our current business outlook, we expect that the area shipment to increase by low 20% Q-o-Q. Blended ASP denominated in a dollar is expected to be flat to slightly up Q-o-Q. Loading rates will be dynamically adjusted based on market conditions. So that was a quick update on our Q1 results, and I'll look for our Q2 performance.

I would like to hand over to Paul for an opening remark.

Paul Peng

Good afternoon, ladies and gentlemen. I would like to go over our results in Q1 and share with you our vision. Q1 was a traditionally slower season with few working days. Our revenue went down by 2.8% Q-o-Q. AUO has been placing more focus on high-end industrial and commercial displays, which posted weaker sales amid slower demand for industrial and commercial models, resulting in smaller revenue contribution. As a result, our sales and profit were impacted negatively. Although our button line in Q1 didn't seem to change much Q-o-Q. Excluding the unfavorable ForEx impact of NT$1.1 billion, our display business would have improved NT$2.4 billion Q-o-Q. However, the NT$2.4 billion benefits from the display business was offset by the fact that Q1 was a softer season for the energy business and a subsidiary of ours went into loss in Q1 compared with posting an income gain in Q4, and we also made some financial adjustments during the quarter. As a result, our Q1 bottom [month] didn't improve much. We also think that we didn't improve fast enough and good well enough in Q1, we will accelerate our improvements in our business. We will also adjust our product mix as needed. However, we will not change our long term strategy for Go Premium, which leverages our technology and management advantages. We will also not make drastic changes to product mix in this related product line.

TV and IT sectors continue to digest excess inventory as shown in our Q1 shipment momentum, and area shipment also improved sequentially. So at the moment, the demand and supply are gradually being more balanced. Most of the panel prices have stopped falling or have improved rebounding. We believe that panel prices will increase sequentially this year. As for our financial structure, our inventory turnover was 48 days in Q1, gearing ratio was 14.9%, up slightly Q-o-Q but still at quite healthy levels. As for Q2, inventory levels in the industry are getting more normal, especially TV. Last year, the TV inventory level was excessively high and the phenomenon has gradually been improved. Today, the TV inventory levels are at healthier levels. Panel purchasing have recovered in advance of China's June 18th festival and Europe and America are restocking actively ahead of the high season at the moment, which are expected to help boost TV panel demand sequentially. As for IT, today, we're seeing consumer products seeing stronger demand and gaming monitors especially experienced the stronger demand. However, commercial products are still being affected by the macro conditions amid technology, job cuts, commercial demand has become weaker. In Q1, we expect companies are going to digest their excess inventories, but inventory levels should resume normal.

In the second half, we expect market demand to return to seasonal patterns. As for the automotive displays, we expect them to grow steadily this year. We are shipping many LED backlight panels and fully integrated display modules in bigger volumes and are expecting robust revenue contribution this year. As for commercial industrial models, except for medical applications, the applications may still take some time to fully recover their demand, especially for commercial IT, retail and public display segments. Market conditions will likely improve at a faster pace in Q2 with the second half being better than the first. Of the three factors disrupting the economy and end demand in 2022, only the waning pandemic offer us with some certainty. As markets reopened, people have been able to return to normal life. However, in China, which was projected to post stronger economic growth, most people remain reluctant to spend savings rate at the country recently increased to 33%, showing that people are still quite conservative in spending, so it will still take some time before the conditions can really improve. The other two factors are Russia-Ukraine war and inflationary pressure, both [cause] for our close attention. Besides inventory corrections, we would need to keep an eye on the impact of macro conditions, international conditions and geopolitical tensions on end market demand, as well as adjust our operating direction accordingly. Basically, we believe the second half will be a stronger period than the first half.

Touch Taiwan recently concluded just last week. With the waning pandemic, countries have reopened their borders, international travel resumed its good momentum. So the exhibition has received many overseas customers and suppliers. At the Touch Taiwan show, AUO demonstrated two of our latest technologies. We showcased Micro LED and Smart Cockpit solutions, both of which received avid interest from visitors. Smart Cockpit attests to our commitment to delivering highly integrated products in the future. We no longer confine ourselves to just being a panel maker, we are also demonstrating the capability to conduct co-marketing with a international system giant. We joined the company to launch a SOC version Smart Cockpit solution. We will commence mass production for Micro LED this year, the first solution to be mass produced will be a wearable device. Currently, we are conducting designing on several wearables products with customers. And also at the Touch Taiwan show, we exhibited tiled TV display, transparent and foldable notebook displays, transparent window displays, unlocking new design and application capabilities. Micro LED's next application will be in the automotive area. Currently, we have one recognition from car makers on our Micro LED solutions. We believe that after we are able to mass produce Micro LED panels, their contribution to our revenue will expand gradually. As for non-panel business, last year, the contribution to our revenue has reached 14%. Non-panel business include energy, system integration, knowledge services. Non-panel revenue is expected to post stronger growth this year. Even with the display business returning to normal business cycles, we hope that our non-panel business will be able to contribute to more than 20% of our revenue in two to three years.

Recently, panel demand and supply has been improving. If the upward cycle continues on the back of no capacity ramp ups from the panel industry in the past two years, we believe that the panel supply and demand will continue to improve. At AUO, we also expect to see sequential growth this year with the second half being better than the first half. There are still challenges around the world. However, we will continue to leverage our stable financial structure and robust performance to accelerate the pace of our transformation. I believe AUO has sufficient resilience to implement our biaxial transformation strategy. Ultimately, we hope that we will not just be a panel supplier, we will be much more than that. The panel industry is afflicted with drastic fluctuations, so our goal is to minimize the impact of the cyclicity of the panel industry. Thank you.

Julia Chao

Thank you, Paul. We will now start with our question-and-answer session. For the first part of the session, we will address the questions that we have collected. The first group of questions are about market update and outlook. First of all, what is our view on the global panel supply and demand? What is the first quarter TV sale through across regions, and what is our demand outlook for TV set sales? Frank will address these two questions.

Frank Ko

Ladies and gentlemen. Good afternoon, I'm Frank. I will answer these two questions. First of all, about the supply and demand in the first half. In terms of supply, end demand has been very weak for civil quarters. Currently, panel makers prioritize improving their profits and lowering inventory levels. The industry's utilization rates are being adjusted in a very disciplined way. Moreover, some panel makers have wound down their capacity or optimized their production line flexibility, helping to make the supply site healthier. In terms of demand, at the moment, after quarters of inventory corrections, inventory levels across product lines have lowered to relatively healthier levels and the inventory level is lower for consumer electronics. So companies have resumed their seasonal restocking activities. For example, they are preparing for the June 18th shopping festival in China and also for the year end holiday season in the European region and America. Panel purchasing has regained momentum. As for the IT applications, gaming products have seen stronger demand. However, commercial applications are seeing more conservative purchasing. High end niche markets, such as car displays or high end medical displays are enjoying relatively steady demand. As for TVs sell through in Q4 last year, which was the high season, sell through was relatively better. In Q1, sell through slipped by 2% Y-o-Y. Size migration continued with the average size increasing by 0.8 inch to 49.8 inch.

In the developed markets, Western Europe has been impacted by inflationary pressure and also the ongoing war. TV demand was weaker. It was especially difficult because Western Europe has been a high end market for TV products. As for the US, consumer momentum continued. Starting from July last year, it has been going through several quarters of positive growth with the first quarter growing by 4% Y-o-Y, boosted by the size migration demand amid Super Bowl. Average size reached 52 inch. As for mainland China, with the market reopening in January, demand gradually recovered. Consumer confidence is regaining its momentum. Brands are actively preparing for June 18th festival, helping to boost consumer application demand. As for emerging markets, which is performing quite nicely, Indonesia and India posted double digit growth in Q1 for TVs sell through. Overall, performance has been improving across the regions but for the performance of the second half, it will depend on external factors, such as the reopening of the market, which is the only certainty that we can be assured of. But for other factors, we will have to pay close attention.

Julia Chao

Next, we will also like to have Frank to talk about IT products demand updates and the demand outlook for Q2.

Frank Ko

For the IT segment, the conditions have not been as favorable as those for TV segment. The IT market has been going through several quarters of inventory corrections. Currently, the notebook and monitor segments have been seeing steep decline with monitor sliding by 24% Y-o-Y in Q1 and notebook sliding by 40% Y-o-Y. Commercial demand has been very low amid inflation, job cuts in US and Europe. Consumer demand for IT products were stronger with the gaming application demand being particularly strong. However, of all the high end products, only large size product demand continued. For example 27 inch and above now account for a larger portion of the total sales. In Q2, we are seeing demand recovering for gaming and Chromebooks. We hope that as inventory levels lowering demand will recover gradually. As for the inventory levels, it has been consistent that all regions have become much more healthier and we will have to pay close attention to end demand.

Julia Chao

Next up, financial related questions. First, utilization rates. In Q1, our loading increased likely to 66%. In Q2, we expect it to increase more. Depreciation and amortization amount was NT$7.7 billion in Q1 and is expected to be NT$34 billion for the entire year. CapEx in Q1 was NT$11.7 billion and we hope that the full year amount will be no more than NT$ 35billion. Currency's impact on our margins. In Q1, New Taiwan dollar gained 3.4% against the dollar and weakened by 4% against the Japanese yen. Both of these are negative factors. So currency impact combined had a negative 1.4 to 1.5 percentage points of impact to our margin. So these were our answers to financial related questions. For the third group of questions, we will talk about AUO's main products and technologies. As Paul mentioned, we have showcased new technologies at Touch Taiwan and we place strategic focus on Smart Cockpit and micro LED. So we will be talking about our deployments for these two aspects. James, would you please?

James Chen

Ladies and gentlemen, good afternoon. Last week at Touch Taiwan AUO exhibited Smart Cockpit and micro LED technology platform as well as industrial chain deployments. Automotive displays and Smart Cockpit are seeing stronger expectations from consumers. People are demanding better and higher experience. They are asking for astonishing interior design and more interactive human machine interaction. Car makers are also innovating their cockpit, shock-on passenger and utilizing passenger cabin more efficiently and more innovatively. For our Smart Cockpit solution, we leverage fully integrated display module plus FID and plus and AmLED, as well as Micro LED solutions. We are also using ARHUD to provide the solutions. Besides, we are also working on designing with car makers, helping us to make strategic and technological deployments earlier as well as deepen our collaboration with car makers. What's worth mentioning is that on the back of the trend for autonomous and electric [flight] driving, we are working on designing new technologies with car makers, and we expect that these efforts will help us to boost our automotive revenue sequentially this year. And for the second quarter, we expect the revenue to exceed NT$10 billion.

As for Micro LED, we have been making investment in Micro LED technologies for more than a decade. At Touch Taiwan this year, we showcased a full line-up of products and industrial and technology deployments. This year, by the end of this year, our Micro LED wearable smart watch application will start mass production, which will be a key milestone for AUO, because we have been working on this for more than 10 years. And finally, we reached commercialization. Micro LED offers the advantages of high brightness, high transparency. This means that we'll be able to deliver transparent, rollable, stretchable displays in the field, which will unlock many possibilities. Also at Touch Taiwan, we displayed tiled TVs displays, rollable and flexible IT products, as well as automotive windshields and window displays. We will continue to expand our collaboration with the ecosystem partners and apply Micro LED in many more applications and products.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Jerry Su from Credit Suisse.

Jerry Su

Frank and Paul, you both mentioned that supply and demand have been more stable. You also said that UT rate has improved to 66% and you expected to improve afterwards. As we enter the second half, are you going to worry that with the rising UT rates in the industry. If the economic conditions continue to be the same, will it disrupt the supply and demand? The second question that I have is on IT, the monitor and notebook business. You have been investing in this segment heavily in the past few years and you have built your technological advantages. Chinese panel makers have announced the plans to ramp up. Some of the new production ones will be focusing on low temp. In response to this move, are you going to deliver new technologies or solutions to differentiate yourselves? Thirdly, last year you invested in cholesteric LCD supplier. How are you working with this company, any plans for mass production, how does it compare against the new product from E Ink?

Frank Ko

First of all about the question on the supply and demand. Currently, the panel industry is still suffering to be quite frank. Many product lines are still going through loss, so the industry has been very cautious about their projections of demand. Companies are prioritizing improving their profits, because demand will increase but we don't think that companies will increase their loading rates aggressively as the industry is still adjusting its loading rates in a very disciplined way. So for the second half, we will pay close attention to end demand and to see how supply and demand play out. As for the competition in the IT market for the short term, the IT segment is experiencing stringent competition and challenges but there are some upsides. The pandemic, which has been going on for three years, has changed how people use IT products, be it for learning or working, or conducting hybrid working models or working remotely. The new way of life has been established in Europe, America and also in Asia. And the future, for IT product, especially notebook products, the replacement demand will likely be stronger than pre pandemic days. As for AUO, we will focus on two aspects. First of all, we will pay more attention to satisfying our premium customers’ demand. We will continue to work with key IT products. They have built very strong relationships with these IT customers and are aligning our new technologies and new product lines with their requirements closely for which we will continue to strengthen our efforts. We are also shifting more key IT products to large generation product lines, so as to improve and maintain our product competitiveness.

We're working on providing high end products, high brightness, mini LED backlight panels, power saving, and we are also using circular materials, which are in higher demand for consumer and enterprises. Our gaming products are now offering as high as 360 to 500 hertz, showing off our strength. As for your second question on cholesteric liquid crystal, I think there are two trends that I would like to share with you. Today, displays have become quite ubiquitous in all kinds of applications, in the IoT era and in line with the ESG trend, customers demand a wide range of display technologies. The demand for power efficiency is strengthening. So AUO will work on several directions. First of all, we will improve the power efficiency of our existing mainstream products. For example, our LCD panels deliver more leading power efficiency and power saving features. E Ink technology or cholesteric liquid crystal are reflection technologies. For these technologies, we will also have diverse deployments. Under our strategy of biaxial transformation, we aim to become a technology supplier of multiple solutions, diverse solutions to meet the market demand. So more and more you will see AUO becoming a supplier of diverse technologies and solutions.

Jerry Su

You mentioned that the market supply and demand remain quite challenging. You also said that you don't expect loading rates to be adjusted drastically in the short term. Does that mean the panel industry will still experience supply surplus in the foreseeable future, when do we expect the profit or the prices to return to normal?

Paul Peng

Currently, panel demand is much more diverse. In the past, the panel industry goes up and down concurrently. So how you perceive the market demand depended on which category you focused on. We expect that our area shipment to be up by 20% in Q2 and the projection was made based on the orders we secured. Moreover, the portion of consumer products and commercial products also affect the adjustments of loading rates. We are also working on dynamic adjustments based on our orders. From the perspective of our customers, we understand that the second half will likely experience stronger demand than the first half. However, older visibility hasn't been as good as last year. We have to do quarterly adjustments sequentially.

Operator

The next call is from [Karen Huang] from Citi.

Unidentified Analyst

I have three questions. First, it is about supply and demand. You mentioned that you expect the second half to be better. Based on your observation of the market, what is the UT rate that you expect to be able to sustain the market supply demand balance? The second question is on automotive applications. Currently, how much of your revenue comes from Mainland China and other regions? In the first half, Chinese car makers waged price war, which affected panel makers. What was the impact on the contribution to your revenue from your automotive applications because of that? Thirdly, what is the contribution of your automotive barebone system to your revenue, what is your goal for the revenue share?

Paul Peng

Karen, this is Paul speaking. What we have observed is that supply and demand are inching toward a more balanced state. In Q1, the utilization rate were very low across panel makers. As you know, with UT what is lost is lost. Even if you have new orders coming in, you won't be able to compensate for the loss. Non-panel makers will increase their loading rates in ways that go far beyond market demand. This is why we dynamically adjust our loading rates based on market demand. And of course, supply chain conditions also play a part in affecting the loading rates here. So we don't think the improving loading rates will create substantial supply surplus.

Frank Ko

This is Frank speaking. I would like to address the question relating to the automotive applications. Currently, AUO remains to be focusing on Tier 1 international car makers, especially on the before market segment. We've been accelerating our deployments in Mainland China from two years ago but today, the market accounts to a smaller revenue share of our car display revenue. The majority of our car display revenue comes from the rest of the world. Moreover, for fully integrated and lamination panels and large size panels, their revenue contribution has been increasing sequentially in the past two years. In the future, we will seek to accelerate system integration and improving the value of our products so as to bring their revenue share to be half of our total revenue as soon as possible.

Julia Chao

Ladies and gentlemen, we will take one last call.

Operator

The last caller is Lisa Chen from Yuanta Securities.

Lisa Chen

I have three questions. First of all, in Q1 you have been affected by a lower solar business. What is your projection for the business performance in Q2? Secondly, also about your automotive displays, it accounts for 17% of our revenue, which is quite a big share. Do you expect it to improve in the future, what is your market share? You have been developing Micro LED technologies. Do you have any plans for the technology to be applied in automotive applications? Thirdly, previously you mentioned that you plan to build module plants in North America than Vietnam. Any changes so far?

Ben Tseng

For your first question, at the moment, we project the Q2 revenue to be on par with Q1 levels.

James Chen

I would like to address the questions on automotive displays. Automotive applications have been entire demand as the demand for Smart Cockpit increases. So the market visibility has been quite high. AUO will definitely secure a place in the market and we will increase automotive applications contribution to our revenue. We will also expand our allocation of resources into the segment.

Paul Peng

Micro LED technologies have been applied in our Smart Cockpit solutions, and this technology has many usages. It takes several years before technology development to mass production. As I have mentioned, the new products entering mass production these years mostly are done by shifting from LCD to mini LED backlight to improve picture quality and performance, and car makers have been quite aggressive in adopting these new technology for displays. We are also leveraging mini LED and to integrate it with systems and barebone systems to create FIDM. The growth of automotive solution revenue will outpace that of unit shipment in the coming years. As for Vietnam, the plant in Vietnam is underway. We expect mass production will commence after the middle of next year. We will start from back end production first. As for North America, we are also making assessments aggressively and we will make a decision this year.

Julia Chao

Ladies and gentlemen, in the interest of time, this concludes our investor conference. If you have any other questions, please feel free to contact us at the IR department at AUO. Thank you very much.

Operator

Thank you for your participation. This concludes ours first quarter results conference. You may disconnect now. Thank you.

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