AUOTY - AUO Corporation (AUOTY) Q2 2023 Earnings Call Transcript

2023-07-27 05:41:08 ET

AUO Corporation (AUOTY)

Q2 2023 Results Earnings Conference Call

July 27, 2023, 02:00 AM ET

Company Participants

Julia Chao - Investor Relations

Ben Tseng - Chief Financial Officer

Paul Peng - Chairman and Group Chief Strategy Officer

Frank Ko - Chief Executive Officer and President

James Chen - Senior Vice President of Display Strategy Business

Conference Call Participants

Brad Lin - Bank of America Securities

Kevin Chen - Citigroup Global Capital Markets Inc.

Jerry Su - Credit Suisse

Lisa Chen - Yuanta Securities

Presentation

Operator

Welcome to AU Optronics 2023 Second Quarter Financial Results Conference. Before the meeting starts, all lines are being placed on mute. After the presentations by the management team, there will be a question-and-answer 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 am Julia Chao, AUO's IR officer. On behalf of the company, I would like to welcome you to participate in our 2023 second quarter financial results conference.

I'm joined by four executives. Paul Peng, Chairman and Group Chief Strategy Officer; Frank Ko, CEO and President; James Chen, Senior VP of Display Strategy Business Group; Ben Tseng, our CFO.

The agenda of today is as follows. First of all, Ben will go over our Q2 results and provide you with our Q3 guidance. Afterwards, Paul will have an opening remark, then we will proceed to questions and answers. For the first part of the Q&A session, we will address the questions that we have collected from analysts before the meeting. And if there are still more questions, we will open the line for you to pose more questions. So that was the agenda.

Now before I turn it over to Ben, please allow me 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.

Now, Ben, please.

Ben Tseng

Good afternoon. Now I'd like to go over our Q2 financial results. In Q2, display demand recovered, driving customers to replenish their stocks. Area shipment [indiscernible] increased, aided by our persistent material cost reduction efforts. Panel revenue increased and gross profit and EBITDA growth returned to the positive range.

In Q2, our net sales came in at NT$63.3 billion, up by nearly 24% Q-o-Q. Gross profit was NT$2 billion. OP loss lowered to NT$4.4 billion. Net loss attributable to owners of the company narrowed to NT$4.8 billion. EBITDA margin was 5.6%.

Next slide. Balance sheet. At the end of Q2, cash and cash equivalents was NT$90.5 billion. Short term debt and long term debt combined was NT$114.3 billion, up by NT$11.1 billion Q-o-Q. Gearing ratio was 14.1%. Q2's inventories stayed at NT$28.4 billion. Inventory turnover was 42 days.

Next slide. Cash flow. We generated from operating activities NT$7.9 billion in Q2. CapEx was NT$5.9 billion. Net change in debt, NT$11.3 billion.

Next slide. Revenue breakdown. We have made some changes to this slide. Firstly, to align with our biaxial transformation strategy and allow for tracking of our transformation progress. We singled out the non-panel business and named it as the vertical business.

The vertical business revenue share was 16% in Q2 as shown in the lower right red icon. The vertical business includes several business segments, mainly, first of all, energy business, secondly, system design and manufacturing services. Thirdly, automotive FIDMs, which are integrated display solutions combining AUO's core display competence with multiple sensing components. Number four, LED displays. And number five, smart field applications.

Except for this new category of vertical business, as shown by the red bar, there is not much adjustment to other categories. The purple bar here is automotive display, originally named as automotive solution. To reflect what I just mentioned, as automotive FIDM has been incorporated into the vertical business segment, so the automatic displays here are pure automotive displays that we sell to customers. These are pure displays, pure automotive displays. Lastly, the figures for the previous few quarters on this graph have also been adjusted accordingly.

Now, let's take a look at the breakdown of revenue in Q2. As mentioned earlier, Q2 net sales was NT$63.3 billion, up by 24% Q-o-Q. Q-o-Q wise, the revenue of each application increased at varying growth rates, thus leading to revenue share changes. For example, TV gained 5 percentage points to 19%, mainly driven by higher demand on the back of customer restocking, market price hikes resulting in sharp area shipment and ASP growth.

Monitor gained 2 percentage points in share, mainly thanks to higher consumer product demand and increased ASP as the result of product mix improvements leading to stronger revenue growth. Revenue of vertical business dropped to 16% in Q2, mainly due to a lower revenue of solar PV engineered projects.

Moving on to shipments and ASP by area. Area shipment increased by 33% Q-o-Q. ASP per square meter went down by 3%, mainly due to growth of the revenue share of TV panels whose ASP was lower than the average product ASP.

Okay, last slide. Our Q3 guidance. Based on our current business outlook, we expect that area shipment to be up by low-single digit percentage points Q-o-Q. Blended ASP is expected to be up by low-single digit percentage points Q-o-Q.

Loading rates in Q3 will be dynamically adjusted based on market conditions.

Okay, so this concludes my talk on our Q2 results and guidance for Q3. Before we proceed with question and answers, we will have Paul to give you an open remark. Thank you.

Paul Peng

Ladies and gentlemen, good afternoon. Welcome to our Q2 financial results conference. As Ben just told you, the demand for panels reversed from the bottom in Q1. The development has been in line with our earlier expectations. We had projected panel demand to hit the bottom in Q1 and improve sequentially throughout the year. We also projected the demand for consumer products to rebound.

As we can see now, customers are replenishing their inventory and the demand for stocking our various applications is increasing. In addition, the industry is progressing orderly and focusing on achieving a steady growth. Supply and demand appears to be more balanced.

In terms of market prices, TV panel prices have been on an upward trend since the start of the year and the prices of TV panels have also – IT panels have also stabilized, thus making stronger contribution to our bottom line.

With the continuous improvement of supply and demand, AUO's area shipment in Q2 rose significantly, driving our revenue to increase by 24% Q-o-Q. For our profitability, as the loading rate increased, TV panel prices have improved and shipments also improved.

Plus our cost reduction efforts, we posted gross profit in Q2, while loss narrowed substantially Q-o-Q. Our non-panel and system revenue continued to grow at the same time. However, energy revenue was affected by price dips, slower progress of installations and interconnections.

As for our financial structure, inventory turnover was 42 days, down by 6 days Q-o-Q. Gearing ratio was 14.1%, similar to the previous quarter, and staying at a healthy level. So, our financial structure is at a relatively healthy level.

Looking ahead at Q3. In fact, starting from the first half of last year, inventory has been the most discussed topic and has become the main thing of the past year or so. Amid the decline of stay-at-home economy post-COVID, the panel industry and downstream sectors were the first to suffer from excess inventory.

So, starting from the mid last year, industry has been making adjustments. After four quarters of inventory corrections, inventory levels have returned to normal in various segments. Some product lines even have lower than pre-COVID days inventory levels, and the industry has become much more disciplined in how they manage their inventory levels.

Overall, panel demand in the second half has been more visible. We think that the worst time for the panel industry has passed. Supply and demand have become much healthier. In Q3, demand is steadily rising. On the back of return to school demand and year-end shopping season, we expect the second half to outperform the first half.

Marketing Institute's projected shipments also to return to pre-COVID average levels, except for smartphone, which may still take some time to return to pre-COVID levels. Other products are returning to pre-COVID levels.

At the same time, we have observed some positive trends for the panel industry. First of all, upward size migration, which is quite visible. During the June 18 promotional season, demand in China, 75 inch TV set was the most popular, accounting for 24% of the sell-through. At the same time, panel remains to be the most appropriate and suitable human machine interaction interface. The number of panels and the size deployed in each vehicle has increased. At the same time, even white home appliances are adopting monitors and displays.

Out of these expanded demand for panels, in the past two years, capacity ramp ups have reduced significantly in the industry, and there hasn't been new production ramps. Recently, Marketing Institute has also projected that the industry's supply and demand will be healthier going forward.

Let me give you a summary. Inventory levels are healthy going into Q3. As we are entering the traditional high season, panel demand is expected to increase. We believe our revenue in Q3 will outperform that of Q2. Currently, the industry is relatively conservative and the demand is somewhat muted in the high season. This puts the efficiency and management capability of panel makers to test. However, we have these advantages in the past. We have built out advantages. We will make more aggressive adjustments and dynamically adjustments to market changes.

Besides expanding our display technologies and our partnerships with our customers in the areas of non-panel and field economy applications. Especially in the high growth areas such as automotive display sector, we will place more focus on developing our strengths.

Starting from last year, industrial electricity bills have run up by more than 20% in Taiwan, putting our energy saving capabilities to even more stringent test. However, in the past three years, we have been able to deliver energy savings by 6.4% at AUO, superior to industry average and government requirements.

Going forward, we will combine our ESG capability and our energy saving advantages as well as our product and technology offerings to apply more low power consumption and circular material in our production. At the same time, we will join hands with our customers to go into the net zero future.

Julia Chao

Thank you, Paul. Next, we will proceed with questions and answers and we will address the questions that we collected from analysts in the first part of the Q&A.

Question-and-Answer Session

A - Julia Chao

The first part of the questions are about panel supply and demand. Secondly, about an update on the inventory levels for panels.

Frank, would you please?

Frank Ko

Ladies and gentlemen, good afternoon. Paul actually first talked about supply and demand across applications. From the perspective of supply, panel industry players continue to focus on improving operating efficiency and profitability. AUO focuses on adjusting our loading rates based on market conditions and demand. At the same time, the industry is focusing on improving specifications and providing applications to meet the demand for upward size migration. And at the same time, lower energy consumption and emissions reduction features are being factored into product design roadmaps.

Generally speaking, the industry supply has been inching toward a healthier stage as for the demand side. After the adjustments of inventory levels, for the past few quarters, the inventory of most applications have lowered to healthy levels or have hit the bottom. In the second half, consumer demand is expected to return to the normal seasonality in the second half. As the stronger season is arriving, brands and channels will shift more focus on preparations for back to school demand and the year-end shopping season. Therefore, panel purchasing momentum is projected to surpass that of the first half for IT applications.

Gaming products continue to enjoy robust demand, while niche products such as automotive and medical products are seeing stable demand.

As for inventory levels, currently, regardless of [Technical Difficulty] channels, inventory across regions has returned to healthy levels and the industry and the brands in general have been more reasonably controlling their inventory levels, which will help prop up demand.

Julia Chao

Next question is relating to TV. Could James please talk about TV sell-through in Q2 and provide us with a guidance for the second half?

James Chen

Ladies and gentlemen, good afternoon. Now I'd like to take a few minutes to talk about TV set sell-through. In Q2, as brands launched their new products, upward size growth has strengthened. Market sell-through was flattish from a year ago. However, area growth was up by 4%. Average size grew by 1 inch to 50.4 inch.

In North America, consumer demand is relatively stable, posting growth for 12 months consecutively in sell-through. 85-inch sell-through posted double-digit growth in Q2 Y-o-Y, helping to boost capacity allocation.

In mainland China, due to the June 18 shopping festival, consumer upgrades trend has been very significant, while the sell-through lowered. Size migration was very strong. Every size reached 64.6 inch, much larger than the global average of 50.4 inch. 50-inch and above TV sets accounted for 60% of the sell through, representing a structural change.

As for emerging markets, in the recent two quarters, sell-through posted double-digit growth. In India, due chew stronger consumer activity, the demand for 50-inch and above TV sets also increased significantly. In Q3, as activities continue to be launched including Amazon Prime Day, back to school and the Asia Games in Hangzhou as well as Cricket World Cup and other activities and sports events, combined with the advent of the traditional shopping season, TV demand will likely get a boost.

Julia Chao

Thank you, James. The next question is about IT. Could James also talk about Q2 sales results and demand outlook?

James Chen

As you have heard from Frank and Paul, the IT segment has been under inventory pressure. After the adjustments of several quarters, today, inventory has returned to healthier levels. Consumer and IT has resumed its restocking demand in the lead up to back-to-school demand and the restocking demand for Chromebook and gaming applications.

Consumer market is seeing a recovery of demand. In Q2, notebook posted a single-digit slide Y-o-Y. However, it grew by nearly 20% Q-o-Q. So, the recovery for notebook computers has been quite strong.

As for commercial models, the demand remains to be muted as enterprises have been more conservative in their spendings. At the same time, consumer application demand is recovering, which will help boost enterprise demand. So, we are positive about the outlook in the second half. We project that commercial demand will gradually recover on the back of resuming consumer demand.

Julia Chao

The next group of questions are financial related ones about our loading rates. AUO's loading rate in Q2 was more than 80%. In Q3, it is expected to reach more than 80% as well. For depreciation and amortization, the amount was nearly NT$8 billion in Q2 and NT$15.6 billion in the first half. For the entire year, G&A amount is expected to NT$34 billion. CapEx in Q2 was NT$5.9 billion NT$17.5 billion in the first half. For the entire year, we hope that the amount will be within NT$35 billion. Those were my answers to financial related questions.

Moving on to the next group of questions, which are about AUO's key products and technologies. Analysts are interested in knowing our automotive application developments, we've been the number one in the CID market and a leader in the automatic display market. Will Frank please provide our perspective?

Frank Ko

Now about our developments in the automotive sector, I would like to take this opportunity to provide with you more details. AUO has been working in this field for more than 10 years. Currently, we have secured a leading position in the automotive display market. In 2022, our automotive panel revenue has exceeded NT$30 billion or US$1 billion.

In the first half of this year, automotive display revenue has reached nearly NT$20 billion, growing by 20% Y-o-Y, showing a very strong growth momentum. We note that automotive will become a key growth driver of AUO going forward.

Why are we so convinced in the persistent growth of automotive segment? That has to do with our advantage in CID where we have secured the world number one position.

What is central information display, CID? This slide shows the interior of the cabin. There are two parts to it. One is the cluster in front of the steering wheel, mainly consisting of meters. This cluster is mainly for demonstrating information. The second part is in the middle of the front seat, combining information displays, audio and video controls, HVAC controls, and combining TV and video features. It has more features and it is also bigger in size. It has been increasingly adopting touch panels. This helps us to leverage our touch technology by integrating them into a display.

Next slide. A key trend going forward is that CID is expected to be a key growth driver for automotive displays. As panel sizes increase and become more feature packed, traditional knob has been replaced with touch panels and panels have been assembled into the interior of driver's cabins. Moreover, the sizes of automotive displays are increasing. On the back of EVs and autonomous driving, the trend is even more pronounced. So this trend is going to extend into clusters, which will expand into the passenger side displays to provide entertainment features. The third slide that I have here describes what I have just talked about. So, what we are seeing is a structural advantage that we are standing to gain.

Displays have become the main medium of the cockpit. And the demand for interaction has also increased. Displays are being integrated with touch function sensors, microphones to provide an integrated unibody panel with bigger sizes and more usage of full lamination and applying more components to provide integrated and immersive experiences.

As for AUO, we are taking advantage of our niche position. On top of that, we have been building more than 10 years of experience in working with our customers, which will help us to benefit our revenue growth going forward.

Julia Chao

Thank you. Ladies and gentlemen, we now open the line for you to pose more questions. To ensure equal opportunity for every participant. Please be reminded to limit the number of your questions to three per call. And please state them all in one go. Thank you.

Operator

Thank you. We now start the question-and-answer session. The first caller is Brad Lin from Bank of America Securities.

Brad Lin

Thank you, management team, for taking my call them. First of all, congratulations for the stellar results. You have reported a recovery in ASP. You mentioned that cost reduction contributed to your gross margin growth. Was it attributable to any kind of material cost reductions? Could you give us more color?

Also, glass substrate suppliers are hoping to improving their prices. Will that affect your second half performance? I will also be very interested in knowing your material inventory levels and ASP outlook.

Also, what about your driver IC inventory level and your perspective for your cost going forward?

Frank Ko

I'm Frank. First of all, about material costs, after COVID, raw materials have been increasing in prices, which have been even more pronounced, given the rising inflationary pressure. In the past quarter, with our efforts to improve our product mix and applying new cost reduction model, our efforts have fared us as quite well.

Oil prices went down slightly in the first half, helping us to cut down on logistic costs and some material costs. Moreover, our inventory turnover, as you can see from our financial results, lowered to 42 days in Q2 and we have been continuing to optimize our distribution and production efficiency and to align with supply chain arrangements, so as to lower our inventory levels.

As for ASP going forward, through our product mix improvements, we hope that there will be more room for improvement.

Brad Lin

Are you seeing any opportunity to lower costs for your glass and driver IC in the second half?

Frank Ko

Currently, glass suppliers are under stringent cost pressure and we are dealing with a cost pressure alongside with them. As for IC, due to the various structures and demands for various applications, currently, we are negotiating for more competitive arrangements with the suppliers. We hope that there will be more room for price drops.

Operator

[Operator Instructions]. The next caller is Kevin from Citi.

Kevin Chen

Thank you for giving us detailed information and outlook. To follow up on the last question, could you provide your perspective on glass substrate price hikes? Some suppliers are looking at 20% price hikes. What is your perspective?

Paul Peng

I'm Paul. I would like to answer your question. Glass substrate suppliers are telling us that they have been under very harsh cost pressure and they hope that they can raise prices. We've been working with their suppliers for a very long time. Today, price negotiations are still underway. However, I can share with you one perspective because the glass market is still dominated by only a few suppliers.

Since they are expressing their intent to raise prices, this shows that the industry is moving towards a healthier development because only when the supply and demand is more balanced will they propose to increase prices. So, this shows that the industry conditions have been much more better than a year ago and we are very positive about the supply and demand dynamics.

Kevin Chen

My second question is related to IT panel prices. Could you please talk about IT panel price trend?

James Chen

This is James. The commercial market accounts for a bigger share of the IT industry. Although consumer products demand has recovered visibly, commercial segment may recover in the second half. Due to the recovery of demand for consumer applications, price hikes have been emerging. In Q2, there was some degree of price hikes. However, for the price hikes to be as significant as TV panels, they will still depend on the pace of recovery in the second half for the commercial models.

Kevin Chen

In the second half, do you expect that the panel prices will continue to increase? Do you expect the upward trend to last into this end of this year?

Paul Peng

This is Paul speaking. Prices are determined by supply and demand. Due to the robust demand, especially for large size models, the TV market has been given a boost. It is enjoying a good time. And the trend for price hikes has been quite certain.

However, as for how long they will last, it will still depend on the supply and demand dynamics. We are not at a place to predict price movements. All we can say is that the industry has become more disciplined and is following their trajectory in more orderly fashion. People are aiming for a more steady growth and stable development. As for how long the growth trend will last and how far they will go, it will depend on the industry supply and demand.

Operator

Our next caller is Jerry Su from Credit Suisse.

Jerry Su

My first question is relating to your Q3 guidance. You mentioned that you expect your area shipment to be up by low-single digit percentage point. Could you provide us a breakdown of the growth rates among your applications? Because this low-single digit growth seems quite muted, especially in the upcoming higher seasonality. Could you also provide a growth projection for your vertical business in Q3?

Also, you mentioned that the upward size migration for TV panels has been very pronounced. However, in the past few years, Taiwanese panel makers hadn't been actively ramping up their Gen 10 engine, 10.5 fabs. As panels go above 65 inch, how will AUO maintain your competitiveness by using old generation fabs to manufacture large size panels?

And in the past few years, mainland Chinese panel makers have been ramping up as their new production come online in the next few years. Will that pose new challenges to the industry?

Ben Tseng

I'm Ben. I will address your first question on area shipment growth. There will be area shipment growth across applications. However, in terms of product categories, the demand for small size IT or automotive displays is relatively certain, likely to grow at a faster pace.

In terms of area, area growth will be bigger for small sized products. Hence our projection of single-digit percentage growth for area shipment growth.

Frank Ko

I'm Frank. About the question on upward size migration for TV panels, TV has been the application that consumes the most amount of capacity. In the past two years, while the number of TV sets hasn't been growing, average size has been increasing. So the amount of area TV panels consumed increasingly.

AUO doesn't have Gen 10.5 fab, but we have multiple Gen 8.5 lines and Gen 6, which is before 65 inch panel production, helping us to meet our key customer demand, especially their demand for high end products. Therefore, in terms of TV demand and the contribution to our critical customers, we are convinced that we will be able to meet their demand.

As for IT segment, as you all see, in post COVID days, as IT product purchasing abate, replacements demand is returning to pre-pandemic levels. Moreover, in line with pandemic-induced digitalization needs and the rise of hybrid working models, today, more businesses provide laptops to their employees. With laptops, users usually would also use an additional desktop monitor. Therefore, consumption of area of panels and the number of total panels needed have been higher than pre-pandemic days. With this regard, AUO has been working on IT process optimization in our Gen 8.5 fabs in the past two years, so as to align ourselves with the long term demand of our customers.

In terms of our position in our customer portfolio and our reach into the high end product segments, as well as our preparation for leveraging the LTPS in making power saving products, we have been making robust preparations. We believe these features will be key factors to consider in the IT segment going forward.

Julia Chao

Ladies and gentlemen, we will now open the line to take the last call.

Operator

The last caller is Lisa Chen from Yuanta Securities.

Lisa Chen

Thank you management team for giving us very detailed information. I have three questions. First of all, could you tell us whether you have made any changes to your CapEx for 2024? Could you share with us your perspectives?

Secondly, you posted loss in Q2. How will you calculate the tax rates in the next few quarters?

Thirdly, there have been some rumors going around saying that the number one TV brand is intending to increase its procurement of Taiwan brands. Do you have any viewpoints about this?

Paul Peng

This is Paul speaking. I will be addressing the first question relating to CapEx. Currently, we haven't arrived at an actual number for our 2024 CapEx, but the direction is certain. That is, we will focus only on optimizing and upgrading our existing production lines. We will also focus on the installation of system production lines and deployments of next generation technologies such as micro LED. Plus, we have been building new production lines in Southeast Asia, which will enter mass production next year. What I can share with you is that the CapEx amount will be much smaller than previously. As for the actual number, we will share more with you late this year.

I will also address the third question and I'll have Ben to answer the second question. Working with our key account customers, we have actually been working with them for a very long time. In the high end product segments, we are not at liberty to comment on any customer's short term decisions or changes in their policies. But what I can share with you is that we are working more closely with customers in purchase relating to next generation displays. And we are also maintaining close relationships and partnerships with customers that can deliver value-add benefits to us.

Julia Chao

Ben, would you please take the second question relating to the tax rate question?

Ben Tseng

On a consolidated basis, we posted loss. However, with tax rates, we have to deal with various tax rates in different regions. For example, our subsidiaries in mainland China, which are contract making firms, posted profits. So we were imposed with 20% tax rate. Depending on our operating conditions and profitability, we have to deal with various tax rates.

Overall, due to our operating loss for the past few years, we do have some tax rates that is usable. And we also have the distributed earning tax to consider, which we may get refunds due to our ongoing investments. At the same time, our subsidiaries in mainland China will be imposed with some tax rates, some more tax burdens.

So, generally speaking, we have to face different tax rates depending on our performance in various regions.

Lisa Chen

Thank you. This concludes my question. I don't have any other questions.

Julia Chao

Ladies and gentlemen, in the interest of time, this concludes our financial results conference for this quarter. If you have any other questions, please feel free to contact us at the IR department at AUO. Thank you very much. We will see you next quarter.

Operator

Thank you for participating in AU Optronics second quarter results conference. You may all disconnect now. Thank you.

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AUO Corporation (AUOTY) Q2 2023 Earnings Call Transcript