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 2022 first quarter results call. I'm joined by four executives: Paul Peng, Chairman and CEO; Frank Ko, President and COO; James Chen, Senior VP of the Display Strategy Business Group; Ben Tseng, CFO. The agenda for today's meeting is this. First of all, our CFO, Ben, will go over our first quarter results and provide you with the guidance for Q2. Chairman Paul will have an opening remark.
Afterwards, we will proceed with questions and answers. We have collected questions before the meeting. For the first part of the Q&A, we will address these questions. Afterwards, if you still have more questions, we will open the line to take your questions. That is the agenda for today. Now, before I turn over to Ben, please allow me 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 two. Ben, please.
Good afternoon. I would like to go over our first quarter results. During the quarter, amid persistent ASP declines, TV and IT products were under bigger downward pressure. The end market demand was suppressed by the pandemic, rising inflation, muted customer demand on the back of increased in-transit inventory levels. Our area shipment went down by 7% QOQ.
However, during the quarter, we worked very hard to improve our product mix to offset the negative impact. Q1 net sales came in at TWD 81.5 billion, down by 12% QOQ. Gross profit was TWD 11.7 billion. OP profit, TWD 5.3 billion. Net profit attributable to owners of the company was TWD 5.2 billion. EBITDA margin was 16.3%. Balance sheet. At the end of Q1, cash was TWD 90.1 billion, up by TWD 10.2 billion QOQ. Long-term and short-term combined was TWD 58.6 billion. Net debt to equity was negative 13.3%. Inventory turnover increased slightly visibly to 47 days, reflecting a drop in area shipment and supply chain disruptions impact on material inventory levels.
Going forward, based on the pace of recovery in the supply chain and transportation and port congestion conditions, we will control our inventory levels prudently. Equity went down by TWD 1.9 billion due to our decision to distribute dividends of TWD 9.6 billion. Next slide, cash flow. In Q1, we generated from operating activities TWD 13.7 billion. CapEx was TWD 8.4 billion. Inflow from financing activities was TWD 3.6 billion. Next slide, revenue breakdown. QOQ-wise, the changes were not that significant. TV share maintained at 17%. Monitor share was 16%. Mobile PC device, 33%. Automotive solutions share increased by one percentage point to 9%. Next slide, revenue breakdown. Again, QOQ-wise, the changes were quite small. 39-in and above accounted for 21%. 20- 39-in, 24%. 10-in to 20-in, 47%.
This segment mainly includes notebook, automotive, industrial, and commercial panels. Next slide, shipment and ASP by area. Area shipment decreased by 7% QOQ. Panel ASP on average went down by 6% QOQ. Now for our Q2 guidance. Amid various recent market uncertainties, based on our current business outlook, we project our area shipment to be down by low single-digit percentage points QOQ. Blended ASP denominated in the dollar is expected to be down by mid to high single-digit percentage points QOQ. In Q2, the loading rates will be dynamically adjusted based on market conditions. This is a quick update of our Q1 results and guidance for Q2. Before we start with questions and answers, we would have Paul to have an opening remark.
Ladies and gentlemen, good afternoon. Welcome to our first quarter investor conference.
Q1 was the traditional slower season, but as we all know, starting from the end of February, Russia-Ukraine War broke out. Within a very short period of time, oil prices and all kinds of raw material prices went up, sending inflation pressure to high levels. In Q1, end market and consumer market started to feel the pinch. Previously, because of shortages of shipping containers and port congestions, freight and transportation time has been prolonged, causing inventory levels to increase at channels. Currently, we are seeing some brands started to adjust their inventory levels and adjust their panel purchasing plans. As a result, Q1 saw an increase in imbalance between supply and demand. Consumer products, especially IT and TV products, saw declines in Q1. Our area shipment went down slightly QOQ. Our Q1 end revenue came in at TWD 81.53 billion, down by 12.4% QOQ.
Profit was also negatively impacted by a slight dip in revenue and panel ASP drops. Thankfully, we have been focused on premium and value-added products. Because of our favorable product mix in Q1, net profit attributable to the owner of the company was TWD 5.2 billion. We remain to be profitable, and our net debt to equity ratio further lowered to -13.3%. Inventory level went up a little bit to 47 days, however. Looking ahead to the second quarter, currently the macro conditions remain to be very unpredictable. With the pandemic control measures in China and also the uncertainties coming from war, we don't know how long the negative impact will persist. These are things that we need to observe closely. The lockdown measures in East China remains to be a big risk factor. The measures have been very stringent.
Today, our production bases in Suzhou and Kunshan are facing various kinds of controls. We are working to meet the government's pandemic control measures and demand. Some of our fabs have been suspended or UT rates have been lowered. As a result, the entire supply chain has also been impacted significantly. The biggest challenge comes from trans-transportation bottlenecks. Materials have been stuck in transit, and raw materials are also stuck in the road. That is why we can only have very rough estimate for our Q2 guidance. We will have to see how long the control measures will last or if there's any sign of moderating in China. We are seeing that the Chinese government are working very hard to contain the spread of the virus, and also it's relaxing its control measures gradually.
However, because the pandemic is still dragging on and the lockdown measures can change from time to time, causing disruptions to the supply chain and making it very difficult for us to deploy technical personnel and to secure raw materials. We think it will still be some time before we can return to the normal levels as we did in the past. Of course, this will pose challenges to our ability to manage the supply chain. At the moment, inventory levels are slightly higher than normal at channels, which will take some time before we can see them digested. Moreover, with uncertainties in the macro conditions and the rising inflation, end consumer market weakened. Therefore, brands currently prioritized on adjusting their inventory levels.
They will become more conservative in their panel purchasing plans, especially when consumer products were significantly impacted amid a weaker market demand in Q1. However, the demand for commercial or business products will remain more stable. For example, commercial notebooks and computers or other low-volume, high-variety products or highly customized products such as automotive, medical, and industrial displays. They are less impacted amid changing consumer demand. Facing market uncertainties in the second quarter, we will do two things. First of all, we will have to adjust our loading rates based on market conditions. We will also invest more resources in making commercial and customized products to mitigate the changing consumer demand. At the same time, we will accelerate the implementation of biaxial transformation strategy, which we launched two - three years ago.
You may have already watched, already have read our announcement that we released today. We've made a new investment in a company based in Canada, in hopes of strengthening our vertical integration to provide more value-added services. Moreover, we will continue to carry out the plans to ramp up the capacity of our high-value lines in Kunshan, Suzhou, and to construct the new Gen 8.5 fab as planned. I would also like to take this opportunity to talk about our three-year investor return policy that we just passed. We have already made a official announcement on this, but there are still more questions that we have received from analysts. I would like to take this opportunity to provide more details.
In terms of investor return, this year, we will distribute 3 NTDs in cash in the form of stock dividend of 1 NTD and cash reductions of 2 NTD per share. Why the capital reduction this time around? Because in the past, when the panel industry expanded rapidly, we needed much capital to support our expansion progress. However, because we were unable to bring in sufficient cash and capital within a very short period of time, so we needed to increase our stock, our share stock to raise enough funds. As a result, our capitalization expanded very quickly. In recent years, as the panel industry plateaued, ramp-up progress has been slowing down across the industry. Moreover, AUO has been committed to smart investment, and we have been seeing the transformation results bearing fruits. Under our biaxial transformation, we have been able to churn in stable cash flow.
In recent years, we have lowered our debt ratio significantly and improved and optimized our financial health. As you saw, our net debt to equity ratio was negative 13.3% in Q1. After the capital reduction this time around, we believe that our capitalization scale will be more in line with what we need for managing our operations. We will be able to create bigger benefits and values with a more lean capital structure. Moreover, we also provided a three-year investor return plan. The cash distribution will not pinch the capital that we need for maintaining a sound operation going forward. At the same time, we will be able to ensure stable return for our stakeholders. This also shows that we want to assure our investors of the prospects of our long-term operations. Let me recap.
For Q2 and the second half, what we're seeing now is that there are many uncertainties. There are the risk factors from war and also the pandemic. A lot of issues may not be able to be resolved within a very short period of time. Also inflationary pressure is increasing. Of course, price increases in raw materials could also put more pressure on operations. Transportation bottlenecks have been eased a little, but not entirely at the moment. As a result, we tend to be more conservative about market demand for consumer products this year. But we believe that the demand will be more resilient for business notebook products and low volume, high mix customized products, because these products are less affected by cyclicity. Secondly, in the post-pandemic era, the demand is increasing for business and commercial products.
We will continue to pursue stable operations and healthy financial structure. We'll work hard to strengthen our relationships with ecosystem partners, as well as developing vertically integrated solutions to improve the values of our products. The Touch Taiwan show will open tomorrow. This year, we will be demonstrating many new technologies, some niche products from us. We believe that this show will be the one that you will see many highlights and new products from the industry. Please spend some time to visit our booth. Because we are still under the shadows of the pandemic, I would like to also take this opportunity to wish you health and safety. Thank you.
Thank you, Paul. We will now would like to start with the first part of our Q&A session. We will address the questions that we have collected from analysts. Frank, would you please first talk about market updates and outlook, and our views on the panel supply and demand for 2022.
Ladies and gentlemen, good afternoon. I'm Frank. I would like to provide our answers for the first question. In terms of market supply and demand this year, as Paul mentioned earlier, from the perspective of supply, with dynamic adjustments of product mixes by companies from the industry and a slowdown in capacity ramps, plus supply chain disruptions caused by lockdown measures in China, the availability of effective production capacity will be limited. From the perspective of demand, while COVID cases ease around the world, Russia-Ukraine war and inflationary pressure make the macro conditions more volatile. Consumers have become more conservative, causing demand to weaken. Meanwhile, niche products such as commercial, gaming, automotive displays still enjoy stable demand.
Further down the road in the second half, hopefully the war will end soon and inventory levels will be adjusted nicely. When the traditional Chinese peak buying season occurs, seasonality will return, which may usher in a new wave of demand. Also, about TV set sell-throughs and the inventory levels, the investors are still very interested in the impact of port congestion and transportation issues. TV is the commodity products within the consumer application segment. In Q1, the impact of the war was being felt, and inflationary pressure also increased the pressure. TV set sell-through went down. Still, average price continued to increase, growing by more than 1 inch year-over-year. For developed markets, sales decline in Q1 in the U.S. was very pronounced due to a high base period a year ago, and a drop in small and midsize TV set sell-through on the back of price hikes.
However, demand remains to be strong for high-end TV sets. $1,500 per unit saw their demand increasing. In Western Europe, demand was suppressed amid rising energy prices, and the demand for TV sets also weakened. The ongoing war also played a role in impacting the demand negatively. In mainland China, average price continued to increase. 65-in set sell-through share increased to 35% compared with 30% year-on-year. An upward price migration trend persists. In terms of inventory levels, port congestion issues improved from a quarter ago. In-transit inventory level lowered. Today, more issues remain to be at the supply chain. As mainland China started to implement COVID management principles, after the restrictions are lifted, the impact may be felt in sea transportation and land transportation, and the results will need to be observed closely. The next group of questions are financial-related ones.
Our loading rates in Q1 were less than 95%. For Q2, the loading rates will be dynamically adjusted based on market conditions. Depreciation amortization amount in Q1 was TWD 8 billion and is projected to be TWD 33.5 billion in Q2. CapEx in Q1 was TWD 8.4 billion, and the full year 2022 amount is expected to be TWD 45 billion. For currencies impact on our margins, due to various movements of different foreign currencies, the combined results had a negligible impact on our margin. The next group of questions are about AUO's key products and technologies. James, would you please provide some updates on our TV, IT, industrial, and commercial applications.
Ladies and gentlemen, good afternoon. This is James. I would like to share with you some updates on our key products and technologies.
As Paul and Frank said. In Q1, we encountered significant market challenges. Inflationary pressure was increasing. Besides that, there was an ongoing war going on. Supply chain issue improvements helped to deliver inventories earlier to the end channels. Currently, inventory levels in channels remain higher. Brands are watching market conditions very closely to adjust their channel inventory levels. Q1 is the traditional slower season. TV panel prices in Q1 continued to face downward pressure. IT and consumer products saw bigger than expected drops. In Q2, customers will continue to adjust their inventory levels. Lower-end consumer products may be more affected by the rising inflation, causing market demand to weaken. At AUO, we focus more on high-end commercial products which enjoy higher demand visibility.
For example, our 85-in TV panels, 8K, and super narrow bezel high-end TV panels, as well as super power-saving LTPS notebook panel, in addition to the 16:10 form factor notebook panels, enjoy relatively higher order visibility. Going forward, AUO will continue to be committed to high-end value-added products. As for car displays, because of the steep increases in oil prices, consumers are more geared toward electric vehicles. This year, EVs growth is expected to be nearly 70% YoY. AUO has the production capability of producing super power-saving LTPS displays. Moreover, we are able to provide advanced display featuring integrated and touch functionality. We stand at a vantage point to capture this new opportunity from the EV sector. We will be working more closely with Tier 1 customers, and we expect that car displays contribution to our revenue will continue to increase.
On the back of contactless economy in the post-pandemic era, the demand is relatively stable for industrial, medical, and retail applications. AUO will invest more resources in making industrial, medical, retail products. However, the impact of war, inflation on business activity and infrastructure investment has yet to be observed. Tomorrow, we will be exhibiting at the Touch Taiwan show in Nangang Exhibition Hall. We will be showcasing next generation LED display technologies, including ultra-large size simulated smart virtual reality studio and hemispherical flight simulator. We will showcase advanced technologies that features Micro LED and seamless assembly. In terms of Micro LED, we will leverage smart cockpit display solutions. Also for car displays, we will be showcasing super power-saving and high-refresh rate displays for AmLED.
Ladies and gentlemen, we will now open the floor for questions. To ensure equal opportunity for each participant, please be reminded to limit the number of your questions to three per call, and please say them all in one go. Thank you.
We now start the Q&A session. If you wish to ask a question, please press zero one. When you hear your name announced, please start to speak. If you wish to cancel your question, please press zero two. The first caller is Brad Lin from Merrill Lynch. Please go ahead.
Management team, good afternoon. I have two questions. First, about your Kunshan fab. I think the Gen 6 fab is very important to you producing LTPS notebook panels. I think the operations have been quite sound. Currently, in terms of the recovery pace, how far are you? Has it been affected by the lockdown measures? Has the UT rate been affected negatively?
In theory, I think this fab provides higher margin products than your average products. Because of the lockdown, does it disrupt your LTPS ramp-up progress? Secondly, I think you are reviving cholesteric liquid crystal displays, which have been launched more than 10 years ago. After so many years, why did you launch this kind of technology again? How has the technology been adopted by your customers? Thank you.
I'm Paul. I would like to talk about the Kunshan plant. I will have Ben to provide answers to the other question. The Kunshan fab is a LTPS fab, mainly making notebook, high-end notebook panels with some capacity being used to qualify car display manufacturing. The lockdown measures have made some impact on the operation of the fab, causing our capacity to lower moderately. Also, we have been unable to secure materials in time.
The negative impact may range between 30%-40%, depending on whether or not the module materials can be in place in time. We are at the phase two ramp-up progress. At the moment, we are installing equipment into the fab. Starting from April, the moving progress has been slowing down, and we have been unable to deploy technical personnel and equipment into the fab. Of course, that we hope that after the restrictions are removed, we'll be able to pick up the pace. At the moment, the mainland Chinese government is implementing static management measures. We will be working with the government to implement anti-pandemic policy. Kunshan fab is mainly making low-temp notebook products. The utilization rates have been quite high. Last year, the revenue was about CNY 6.8 billion renminbi.
As for your second question on cholesteric liquid crystal technology, this is actually not a new technology. It's been a technology in the making for more than 10 years. It offers better, increasingly better performance in terms of color performance, power consumption, and temperature range. In terms of applications, with the increasing adoption of AI and IoT technologies, we are seeing that this reflection type displays will enjoy higher adoption in education, transportation, and traffic, as well as smart city applications. That is why we will be showcasing the cholesteric liquid crystal technology at the Touch Taiwan this year.
You mentioned that the impact on your Kunshan fab so far has been around 30%-40%. Is that right?
Yes.
Okay. Thanks.
Thank you. The next caller is Derrick Yang from Morgan Stanley.
Management team, good afternoon. Thank you for taking my questions. I have two questions, mainly about IT panels. The first one is, rumor has it that Chinese panel makers have been more aggressive in their stance towards the IT market segment. I heard that you say your IT products accounted for nearly 50% of your revenue. Given the strategic change from Chinese panel makers, would that make an impact on your future competition strategy? That is the first question. Also, the next one that I have is, there have been increasing discussions on the market about OLED's applications in IT panels. Currently, OLED is mostly made on Gen 6 lines. Some people are even talking about making OLED IT panels on bigger generation production lines. I wonder if you could talk about your thoughts on OLED applications in IT sectors.
Would you think it would be more like TV in terms of applications or more like smartphones? Thank you.
Hi, this is Paul. I will address the first question. Yes, indeed. For the past two years, TV has seen significant ups and downs in demand, causing its profitability and pricing to be highly volatile as well. As a result, some Chinese panel makers have shifted some of their production capacity to making IT products. But for AUO, our IT product portfolio has focused more on high-end products, including professional use, gaming, super power saving, high-end, and mid-end products. Whereas Chinese panel makers are making mainly entry-level products. Of course there will be competition. I don't think, however, that the impact on AUO will be that significant.
When it comes to IT customers, the customers that we have are the ones that we have been working for more than 10 years. We have been co-developing or co-marketing products with these customers, and we have been doing that for more than 10 years. Therefore, I believe that we have advantage over Chinese panel makers and other new market entrants. Of course, there are other things to take into consideration, such as the availability of materials, customer management. These are the things that require long-term investment and management. We did observe the situation where Chinese panel makers shifted more capacity to make IT products. Based on our analysis, we don't think that for the short term, the impact will be that big for us.
Hi, this is Frank. I would like to answer the second question.
I think compared with LCD, when it comes to notebook or monitor applications, I think OLED has been very successful in increasing its footprint in smartphone applications. But smartphone, notebook, and monitor present very different requirements in users' usage patterns. For smartphones, you usually use them for two-three years, and the product lifecycle is much shorter. Whereas IT or notebook computers are usually being used for a much longer time. The lifecycle time is even longer for monitors. Also, the material decay of OLED panels could accelerate quickly when they are used for a longer period of time, so power consumption would be a big concern. If you need to charge your OLED products quite frequently, it doesn't fit the behavior or the habits of users. We leverage our low temp technology, which is a high power saving technology.
With our Mini LED backlight technology, we are able to provide power saving notebook panels and also high-end monitors, as well as gaming displays featuring higher picture quality, better power profile, and longer life. I think these usage requirements remain to be challenging for OLED panels.
The next question comes from Jerry Su of Credit Suisse. Please go ahead.
Ben and team, good afternoon. I have two questions. Firstly, in your guidance, you mentioned many uncertainties. Could you give us some color around your assumption? For example, for the Kunshan fab, when do you think that the restrictions can be lifted? And also, could you talk about your assumptions for external market conditions? Moreover, about the cholesteric liquid crystal e-paper. Could Frank please let us know how it stacks up against the existing color or black and white e-paper technology available in the market? What kind of advantages do you enjoy?
Okay, Jerry. I think for your basic assumption, here is our reasons. First of all, about the Russia-Ukraine war, if it remains to be a factor, whether it will be escalate or expand into neighboring countries or regions, or even triggering a larger scale war. Of course, we hope that the war can end very soon, because people have been very miserable. Also, about the control and lockdown measures in China. Our expectation originally was that the measures would be gradually lifted around the end of the month and helping us to resume to normal. The hope was that in Q2, we will able to incrementally resume normal operations. As for inflationary pressure, we based on media reports on U.S. Fed's interest rate hikes to project the impact from inflation.
Okay, thank you.
Also, for the second question on reflective cholesteric liquid crystal. I think compared with e-paper technology available in the market at the moment, cholesteric liquid crystal is also bistable. Meaning that the power supply is not needed while displaying images. They have similar power profiles. However, cholesteric liquid crystal has better performance in terms of color presentation. Moreover, when it comes to materials required, a lot of the materials are similar with liquid crystal displays that would result in higher flexibility in material availability and material stability as well. In addition, reflective displays are very strong in applications, especially in outdoor applications and high temperature range applications.
Thank you. May I have a follow-up? For Q1, your IT products contributed to half of your revenue. In terms of financial performance, it seems that your commitment to value-adding has paid off. Maybe you can give us some color around your IT segment, the one that accounts for 50% of our revenue. Maybe you can give us a breakdown between the contribution of commercial and consumer applications.
Well, it depends on the timeframe. Last year, for example, consumer products ratio was very high and the demand was quite high originally. Then this year, demand for consumer products started to go down. At the same time, the demand for commercial products becomes more pronounced. Sometimes it's half and half in terms of the breakdown, but I think in different times their performance will be different. Amid the stay-at-home economy in the post-pandemic era, consumer products may be higher than half of the revenue. Then there are some consolidations going on. It's very difficult to give you a specific breakdown. What we can say is that AUO is very strong and very committed in the areas of consumer or commercial products, especially in mid to high-end product mix.
Ladies and gentlemen, in the interest of time, we will take one last question.
The last caller, Lisa Chen from Yuanta Securities.
Management team, good afternoon. Today because of some external environment factors, conditions, there are some shortages for raw materials. Could you let us know what items experience the most severe shortages? Previously, there was a steep shortage for semiconductor products. What are the products that experience severe shortages at the moment?
The next question is that, if we are to assume that in the second half, maybe in Q3, that operations will become normal and market conditions will also become normal, is it likely that your gross margin will be inching toward to the level of your Q4 last year level? Because what I'm seeing now is that your gross margin and OP margin was affected by an increase in costs and transportation costs.
Hi, Lisa. In terms of material shortages, I think today's situation is very different from last year. Last year, the semiconductor shortages occurred across the board. This year around, the shortage of raw materials was caused by lockdown measures. A very special phenomenon is that non-essential materials are usually the one experiencing most severe shortages, because these are the materials that usually have the lowest number of inventory days.
Today, a lot of problems occur because of transportation bottlenecks, such as cartons and packaging materials. These are the areas that are experiencing severe shortages. Don't be surprised, because they are non-essential materials. Shanghai, for example, announced its white-listed firms for the first time, which included more than 660 companies. None of them were those material providers. It's very important for every company to be able to have their products or shipments out and have the raw materials needed in. Today, the situation is very dynamic. We are spending a lot of time monitoring supply chain situation, trying to secure materials. Actually, we have been spending most of our time finding truck drivers, identifying optimal transportation routes. There are a lot of things that need to be done and dealt with. We hope that with.
As the pandemic eases, we'll be able to resolve the bottlenecks and resume normal operations.
For the other question on our margins, of course, that is what we are hoping for. That is, with demand stabilizing, supply and the entire supply chain will be able to be more normal. We hope that our margin can improve. However, anti-pandemic and lockdown measures have indeed increased our costs. We have been experiencing extra expenses. For example, transportation costs are rising. Last year, air transportation and freight costs increased significantly. This year, it was land transportation that has been increasing significantly. These are all additional costs that we need to be able to control. We hope that we can do a better job at controlling the costs.
Thank you. Ladies and gentlemen, in the interest of time, this concludes our investor conference this quarter. If you have any other questions, please feel free to contact us at the IR department. Thank you. We will see you next quarter.
Thank you for participating in AU Optronics's 2022 first quarter investor conference. This concludes today's meeting. You may all disconnect now. Thank you. Goodbye.