AU Optronics Corp

OTC:AUOTY

Earnings Call Transcript

[Jerry Su, executive]

Ladies and gentlemen, good afternoon. I'm Jerry Su, Senior Director for Investor Relations. On behalf of the company, I would like to welcome you to participate in our 2024 third quarter financial results conference. Due to the typhoon, today's results conference is being prerecorded. I'm joined by 4 executives: Mr. Paul Peng, Chairman and our group's Chief Strategy Officer; Mr. Frank Ko, CEO and President of AUO; Mr. James Chen, Senior VP of our Display Strategy Business Group; and Mr. David Chang, our CFO.

The agenda of today is as follows. First of all, our CFO will go over third quarter financial results and provide you with the guidance for Q4. Then our Chairman and our CEO will respectively have an opening remark. After that, we will proceed to Q&A. We have collected questions from analysts before the meeting, and we will address those questions in the Q&A session. Due to the prerecording format, there will not be live Q&A today. If you have any questions, please feel free to contact us after the meeting. This is the agenda for today.

Now before I turn over to CFO, 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. David, please.

[Po-Yi Chang, executive]

Good afternoon. I am David. I would like to go over our third quarter financial results. Our Q3 net sales came in at TWD 77.7 billion, up by 4.6% from previous quarter, mainly driven by the growth of Display and Mobility Solution businesses. The panel business was boosted by the increased demand from branded customers in advance of the year-end peak season, thus leading to an increase in shipments and revenue. The revenue of Mobility Solution business was buoyed by the steady growth in end-user customers purchasing. However, the Vertical Solution business was affected by the completion of large-scale solar PV projects in the previous quarter and weaker-than-expected demand for solar modules in the current quarter, which offset some of the revenue growth in the Display and Mobility Solution businesses.

In terms of the gross profit, the effect of the increased revenue and loading rates was partially offset by TV panel ASP decreases and the revenue recognition for a large-scale solar PV project in the last quarter, resulting in an increase of only TWD 100 million in the absolute number of gross profit. Gross margin lowered slightly by 0.3 percentage points. OP expenses increased by TWD 500 million in Q3, mainly due to the investment in advanced technologies, including micro LED R&D expenses. Thus, the OP loss amounted to TWD 300 million. Q3 net loss was mainly attributable to the company's loss of TWD 200 million from the provision of idle equipment due to the disposal of the Tainan fab and income tax expense of TWD 300 million. Therefore, net loss attributable to the owner of the company was TWD 930 million, and the EBITDA margin decreased to 10.6%.

Next, balance sheet. In Q3, cash and cash equivalents was around TWD 63.3 billion. Short-term and long-term debt combined was TWD 115.7 billion. Gearing ratio was 33.4% at the end of the quarter, up slightly Q-o-Q, mainly due to a decrease in cash as a result of cash distribution from capital surplus and continued debt repayment. Inventory turnover was 44 days with the inventory remaining at a healthy level.

Next, cash flow. We generated from operating activities TWD 9.4 billion in Q3. Depreciation and amortization was about TWD 8.5 billion. Cash outflow from investing activities was TWD 3.8 billion. CapEx was TWD 5.7 billion. Advanced receipts from disposal of assets were TWD 2.5 billion. Outflow for financing activities was TWD 14.7 billion as a result of repayment of bank loans of TWD 7.1 billion and cash distribution from capital reserve of TWD 6.9 billion.

Next, revenue breakdown. The revenue share of Display rose 2 percentage points, mainly due to the increased TV and notebook shipments amid higher market demand during the peak season. The share of Mobility Solution was flat Q-o-Q, but the absolute amount of the revenue increased Q-o-Q, growing steadily. Vertical Solution slipped by 3 percentage points, mainly due to the completion of large-scale projects in the last quarter and the decreased shipment of solar PV modules in the current quarter.

Next, business outlook. First, about Mobility Solution, Q4 sales is usually affected by the holidays in Europe and the U.S., but we are seeing stronger demand from customers in Asia. Therefore, the revenue of the Mobility Solution segment is expected to be flat Q-o-Q. Revenue of Vertical Solution is expected to be flat Q-o-Q on the back of the recognition of Avocor and stronger energy business revenue. Display's revenue is expected to slip Q-on-Q due to seasonality, while it is expected to be flattish Y-o-Y.

[Jerry Su, executive]

Thank you, David. Now we would like to ask Paul to give an opening remark.

[Shuang Peng, executive]

Good afternoon. In Q3, on the back of stronger-than-expected panel purchasing from customers -- from consumer electronics brands from the -- for the year-end peak season, the Display revenue grew by 9% Q-o-Q, exceeding our estimate. The Mobility Solution business also grew by 4% Q-o-Q. However, Vertical Solution was affected by the engineering revenue recognition timing of the energy business, posting a lower revenue Q-o-Q. However, driven by the other 2 pillars, the overall revenue of the company grew by 5% Q-o-Q, reaching the highest single quarter revenue of TWD 77.7 billion year-to-date.

In terms of our profitability, the gross profit and OP margin were on par with the previous quarter, while OP loss was TWD 300 million, mainly due to an increase in OP expenses Q-o-Q, including the final payment of professional fees relating to the BHTC transaction, the expenses of moving equipment back to Taiwan after the closure of our Singapore lab -- fab, and expenses associated with preparing the fab in Tainan prior to sales and R&D expenses. These items are all unnecessary expenses for the company's operation. These are also unnecessary, but we believe there is still room for improvement. So the management team will focus on improving these items in the future. The company's overall financial structure remains robust with inventory turnover of 44 days and gearing ratio of 33%, maintaining a relatively healthy level.

Looking into Q4, branded customers restocking activity for the year-end shopping peak has basically come to an end. Some customers have made advance procurement, so demand will likely weaken slightly. Meanwhile, on the back of China's appliance trade-in program, customers' procurement will be more active. But the Display segment is still entering the offseason. Therefore, we estimate the Display revenue to be flat Y-o-Y in Q4.

Macro economy-wise, although there are no major changes, some key points deserve our attention such as the situation in the Middle East, the ongoing Russia-Ukraine war, the result of the U.S. presidential election, which will soon come to an end. And after the election result is finalized, some uncertainties will disappear. However, the U.S. rate cuts will weaken U.S. dollar. These may have favorable or unfavorable impacts on market demand. So we have to continue to pay attention to global dynamics. The demand for the other 2 pillars, Mobility Solution and Vertical Solution, in Q4 will also be affected by the macro economy and seasonality despite performing more steadily than the Display segment.

Although Q4 is typically a slower season, there are some variable aspects in the environment. First, panel industry players continue to produce products according to demand and are dynamically adjusting their loading rates. And with the closures and sales of fabs in the industry, then the industry supply will likely be more disciplined for the year ahead and the year after. In the IT segment, we are slightly more optimistic about the demand outlook for next year as more companies are asking their employees to return to the office. Moreover, after the rate cut, we expect corporate spending budget to gradually recover and commercial model demand will start to pick up.

During COVID, the PC installed base expanded significantly. And next year, we will enter the 4- to 5-year replacement cycle. Plus factors such as AI PCs, Win 10 end of life and the launch of new gaming graphics cards, we think IT demand will likely strengthen next year. As for TV, size migration is continuing. During the October 1 holiday, sales of large-sized TVs above 75- and 85-inch were very strong. We are also optimistic about the supply and demand of the industry next year as China's policy supporting TV trade-in is stimulating the growth of the consumer segment.

Regarding asset revitalization, the Tainan plant is expected to complete the transfer by the end of this year, bringing TWD 4.2 billion in profit for us. We will continue to revitalize our assets, which is part of our transformation strategy. In the future, we will continue to review the operational efficiency of different generation lines, and we will continue to manufacture our products at the most appropriate lines. In addition, through asset revitalization, we will optimize the space utilization of our fabs to move towards an asset-light manufacturing model and achieve the goal of reducing capital expenditures. We will also revitalize idle plants. In addition to sourcing out the outdated and exchanging them for higher-value products or production lines, we will also sell them when appropriate. The funds will be used to support the company's overall working capital deployment to spur the development of the premium business. Of course, the money will also be used to maintain a stable return for our shareholders.

Finally, I would like to update you on our recent progress in ESG. In August, we organized the fifth CSR Prosperity Conference, inviting 70 suppliers. We have declared 2023 as the first year of plastic reduction, and we hope to achieve the goal of plastic neutrality by 2030. This year, we have joined hands with several manufacturers to organize the first Ecosystem Exhibition on Plastic Reduction to demonstrate how to recycle and reuse plastic waste and show our achievement in plastic reduction. We're also happy to announce that the second phase of our carbon reduction target has passed the SBTi target this year, and we are working to more actively lower carbon emissions going forward. AUO committed to the 1.5 degrees Celsius ratio and proposed to use 2021 as the basis to achieve an carbon absolute reduction of 42% in for Scope 1 and Scope 2 emissions by 2030. In terms of Scope 3 emissions, we aim to meet the goal of 25% reduction or below 2 degrees Celsius.

This concludes my update of this quarter, and I'll hand over to Frank to provide more updates on the company's operations. Thank you.

[Fu-Jen Ko, executive]

Thank you, Paul. Paul has just talked about our outlook and the perspectives about the Display business. I will talk about our perspectives about our other 2 pillars, Mobility and Vertical Solution. Now about Mobility Solution, I think once of the questions that we often get from investors is the synergies that we expect from the consolidation between AUO and BHTC and what is the current progress. I think there are 2 points that I would like to share with you.

In terms of our consolidation with BHTC over the past 6 or 7 months, we have been focusing on several aspects. First, consolidation and coordination across both organizations as we hope to advance core competency development and our positions in the industry as well as delivering most advanced services and solutions. In the past quarters, we have won new orders and new critical customers, and we have embarked on integrated field application designs. There have been some very encouraging results.

As shared in the last investor conference, with the consolidation of BHTC, we secured a display HMI solution project from a new European commercial carmaker. And similar progress is being made with other customers during these past several months. For example, before the consolidation, BHTC was unable to enter the supply chain of existing customers of AUO in North America where we are developing very well. Through the collaboration between our business teams, this new customer in North America has awarded us a project, which will integrate the traditional mechanical interface with displays. While they were projects that AUO and BHTC alone could not clinch in the past, today, changes are happening as synergies emerge.

Over the past 2 quarters, in the critical markets around the world and emerging markets, in terms of display HMI solutions, customers are reaching out to us more actively, and we have been opening up new opportunities, allowing us to transition from a Tier 2 supplier in the supply chain unable to negotiate and engage with OEM customers directly to becoming a player that is able to serve a more active role, discussing directly with carmakers to deliver total solutions. With this development, we can envision that in terms of the speed of our customer base expansion and the diversity of our customer profile, we can continue to expand the added value of our products and continue to make more contribution to our profit as well as opening up a better market landscape for our company.

Moreover, in terms of our joint marketing campaigning activities, in September this year, BHTC and AUO participated jointly in the Vehicle Display and Interface exhibition in Detroit. This is a special trade exhibition in the automotive field and an exhibition that AUO wasn't able to participate very actively in the past. By participating in this kind of trade shows and exhibitions, we expect the AUO Group will be able to get better development opportunities in the automotive segment. So these are some of the examples that we have seen materializing from the collaboration between AUO and BHTC as a one team. And our joint development has been delivering very substantial results. This will also help us achieve our goal of achieving double-digit CAGR growth for the Mobility Solution.

Moreover, I think everyone is very interested in the cost synergy. We are gradually seeing meaningful results materializing. If you recall last quarter in the investor conference, Ben shared with you that we have been taking a stock of the resources on both sides. And we have recognized some items that we can save costs further, including consolidation of manufacturing sites for synergy creation, improving product designs and expanding our procurement scale as well as reducing overlapping investments in R&D and manufacturing. And financially, we can also save some interest expenses. These are all the assets that we can strive for, and this is also an ongoing major project that we are conducting. Based on our current estimate, over the next few years, we are convinced that we are able to achieve a cost reduction of USD 50 million. And of course, we will continue to save more so that we can bring the cost savings to a bigger scale and to advance further. We will continue to share with you more details when they come out.

Also, in terms of the advancements in the Vertical Solution, we are seeking to apply AUO's core display technologies and our competencies into the entire ecosystem and value chain so as to strengthen our capabilities to produce soft and hardware integrated solutions. For the past several years, we have been working very hard on building a comprehensive ecosystem built upon our few application capabilities, and we are very convinced that we have to work with our partners to accelerate the development of integrated solutions.

To accelerate this progress, we have been making strategic investments. We have invested in or acquired ComQi, JohnRyan, ADLINK, [ Lextar ] and Rise Vision, companies specialized in different specific applications and industry sectors. They are placed in strategic positions in the value chain, and they have been working with ecosystem partners in different countries. They help us to enhance our own domain knowledge across different industry sectors and to build our presence in different channels, including the channels for hardware and software.

In September this year, we made another acquisition. We have acquired Avocor. And as a 100% stakeholder of the company, we will be leveraging this company to build cross-country brand sales and channel capabilities. By leveraging these professionals and domain knowledge of this company, we will be able to accelerate the internationalization of our talent and the diversity of our talent in AUO and AUO Display Plus, ADP.

Moreover, today, our Board of Directors has passed a decision to make adjustments to the stockholding structure of Vertical Solution. AUO has made investments in JohnRyan and ComQi. We are going to transfer these 2 companies to ADP so that they will become 100% subsidiaries under ADP. This will help us to accelerate the resource integration progress that we are having in North America and continue to benefit our development progress in the retail sector as well as allowing us to build a better and more comprehensive footprint in North America.

So besides strategic partnerships, we are also spurring transformation with our branded customers and suppliers to build an ecosystem. This is a very important priority of our company. We are very happy to report to you that last week, ADP just concluded a very successful partner conference in the education and enterprise market sectors. ADP gathered its critical suppliers and customers across the enterprise and education segment. It is able to listen to the voices and feedback from different customers and partners based in different locations and regions. At the same time, through this platform, its ecosystem partners are able to engage further with ADP in the development of products and find more opportunities. So this is a very important and meaningful benefit that we're seeking through building an ecosystem partnership.

In addition to managing our relationships with our enterprise partners, it is also very crucial for us to retain and attract talent to help us spur and advance transformation. This is also very critical for us to manage our ecosystem partnerships. Here, I would like to share with you the latest updates to our talent acquisition.

Recently, ADP appointed Dr. CC Lee as the Chief Technology Officer. Dr. Lee previously has been working at ITRI for more than 25 years, having been the Deputy Director of DTC and Deputy General Director of EOSL at ITRI. He is very, very skilled and very familiar with various technologies in the display technology aspect. We are also hoping that he will be able to lead -- we are also hoping that he will be able to help us to drive transformation across ADP's R&D team based on his successful experience in leading DTC and EOSL in developing new technology solutions. We will be relying on Dr. Lee's expertise, helping us to align the technology and product development between ADP and AUO. At the same time, he will be helping us to incubate more business opportunities and develop vertical market opportunities.

Earlier this year, we have also appointed Professor Manfred Wang as the Chief Design Officer at AUO innovative design research institute. Professor Wang is a very famous celebrity in the industry. He is currently a professor at the Design Department at National Taiwan Normal University. And before that, he was a designer at Porsche in Germany. And after he returned to Taiwan, he had been the Design Director at Acer, helping BenQ to design a portfolio of products. We hope to rely on the expertise of Professor Wang to help us advance the developments of our vertical and mobility Solutions, not only allowing us to deliver more creative and innovative designs to our customers, but also to help our design and applications to better align with the actual needs of our customers, therefore, allowing us to become a total solution provider rather than just a component provider.

So if you look at the ecosystem of the Vertical Solution, through our efforts over the past few years, we have been building an ecosystem that is increasingly more comprehensive. Going forward, we hope that our Vertical Solution business will also be able to achieve double-digit CAGR growth and to deliver stronger profitability. We believe its margin will likely steadily exceed that of the Mobility Solution and the Display segment.

So to sum up about the outlook for the 3 major pillars. First of all, in Q4, we will be seeing Display entering an offseason as the seasonality demand -- as the seasonal demand weakens. However, for the other 2 pillars, currently, we are enjoying higher order visibility and steadier revenue streams. This will help to offset the impact of a slower seasonality for the Display segment. As for the next year, we expect to enjoy healthier supply and demand for the display industry, and our Mobility Solution and Vertical Solution will continue to provide us with higher order visibility. We expect to see these 2 pillars continuing to grow in terms of its revenue.

This concludes my remark. Thank you.

[Jerry Su, executive]

Thank you, Paul and Frank, for your remarks, and we'll proceed to the questions that we collected from analysts before the meeting. The first group of questions are financial-related questions. Could you provide an update on the D&A and CapEx for this year? Do you expect your CapEx and D&A to visibly reduce next year? Moreover, could you talk about your utilization rate for Q3 and Q4? David, would you please?

[Po-Yi Chang, executive]

First of all, about depreciation and amortization, in Q3, the amount was TWD 8.5 billion. For the entire year of 2024, we are maintaining our guidance of TWD 34 billion. CapEx in Q3 was TWD 5.6 billion. Recently, we have reviewed our expenses and our projects, and we have decided that for the full year of 2024, CapEx will lower to TWD 31 billion, down by approximately TWD 2 billion that we shared with you last quarter.

Secondly, about the CapEx and D&A for next year, as they are still subject to our Board of Directors' approval, we will share more with you in our investor conference next year. However, one thing I would like to note is that as we talked about in the last quarter and based on our discussion this quarter, we have shared with you that more and more of our resources will be allocated to Mobility Solution and Vertical Solution. So we will be shifting from heavy investments in panels to light asset investment base -- investment models. So long term and short term-wise, our CapEx and depreciation and amortization will continue to lower sequentially. As for our loading rates, our Q3 loading rate was better than the quarter -- than the previous quarter. We will dynamically adjust the loading rates based on market demand in Q4, which will see slower seasonality as well as the home appliance replacement demand in China.

[Jerry Su, executive]

Next question. Are the returns of Vertical and Mobility Solution segment higher than that of the traditional Display business? Could you also provide some color around your shipment area and ASP per area for Q4? David, would you please?

[Po-Yi Chang, executive]

Vertical and Mobility Solution segments are light asset investments. As we told you before, Mobility and Vertical Solutions' profit margins are higher than that of the Display business. So overall speaking, the ROIs of Vertical and Mobility Solutions are indeed higher than that of the traditional Display business. That is for sure.

Moreover, we will be expanding our magnitude in our development efforts in the ASP per area. And the main growth drivers of these 2 pillars are integrated solutions, not from pure panel business. As we have shared with you last quarter, it will no longer be meaningful to estimate AUO's revenue and profit margins using the traditional methods of capacity utilization, panel shipment area and ASP per area.

[Jerry Su, executive]

Thank you, David. Moving on to questions relating to the display market. What is the TV and IT product sell-through in 2024 fourth quarter and 2025? Could you provide some color? Also, what is the impact of China's promotion of home appliance trade-in on TV panel prices and demand? James, would you please?

[Chien-Pin Chen, executive]

In terms of the display market and business outlook, in terms of TV, this year, we've had major sports events. And many customers, many companies have procured panels in advance in Q2 and Q3, which have helped boost demand. However, in Q4, we are entering the traditional offseason. At the same time, in China, the government is introducing home appliance trade-in subsidy program. And the October 1 sales through was also very robust, growing by 14%. With the upcoming Black Friday sales and holiday season sales, it is expected that customers will be able to digest their stocks, which they have procured in advance of the holiday season. Therefore, this year, the TV panel sector will likely enjoy slight growth. As for the next year, during the fourth quarter, sales promotions will mainly focus on 75-, 85-, 88- and 100-inch segments. So on the back of the strong size migration, the demand for area will also slightly grow. In terms of next year, demand will also be relatively steady, helping to sustain panel prices.

In terms of IT, sales of monitors due to promotions, especially in the segment of gaming products, have enjoyed growth for 3 quarters year-over-year consecutively. However, with conservative enterprise demand, replacement cycle and demand on the enterprise side is not that visible. These 2 factors combined, we are expecting to see low single-digit growth for the entire year of 2024. However, with the upgrades of Windows 10 and the launch of new GPUs, demand will likely increase, helping to drive low single-digit growth.

In the notebook market, the segment has been posting growth for 2 quarters consecutively. And the panel purchasing momentum has been very strong over the past 2 quarters, aided by the launch of AI PCs. We are expecting to see that -- the segment to post low single-digit growth for next year on the back of the demand for Windows 10 upgrade as well. We are projecting that the market demand continue to be healthy for the notebook segment.

[Jerry Su, executive]

Thank you, James. Next question, about micro LED. Could you please update us on the progress that you've made with the R&D for micro LED and the market performance? Chairman Paul, would you please?

[Shuang Peng, executive]

In terms of micro LED, we are mass-producing wearable, large-sized and TV panels. Last week, we announced that we are transitioning from Gen 1 to Gen 4.5 line. The purpose is to expand our production scale to be able to manufacture panels -- micro LED panels as large as 41.6-inch.

Let me give you an example. To assemble a micro LED panel as large as 127-inch, in the original size, we would have to assemble 100 sheets. So today, we only need to -- in the future, we will only need to assemble 8 sheets. This will help us to significantly improve our screening technology and mass transfer as well as have a better control of our yield rates. We are also hoping to see our cost structure to improve significantly.

Going forward, we will be transitioning into Gen 4.5 mass production, aided by the better efficiency for wafer and mass transfer. We are seeing some drastic improvements in our yield rates. So we are going to project -- maintain our original projection. That is we are going to lower our cost by half every 2 years.

In addition, besides wearables, we are having more customers working with us or we are building more product models. In terms of automotive customers, they are actively discussing micro LED applications with us. We expect to see by 2026 or 2027, there will be micro LED automotive applications on the market. So we expect that after the deployment of micro LED technology in the automotive segment, extensive application of micro LED will be materializing, and we are very optimistic about these developments.

[Jerry Su, executive]

The next question is about fan-out PLP. What is your perspective on fan-out PLP and glass substrates packaging? And what are the strengths of panel makers in this aspect? Frank, would you please?

[Fu-Jen Ko, executive]

I think packaging is really a hot topic in the industry. And fan-out PLP is still in the spotlight among panel makers given the expanded size of the substrates and the potential benefits of panel production process. Existing mature process such as that of power ICs can be supported by the existing process and has been certified, which is of interest to the industry right now. While the process of glass substrates offers opportunities, it also has limitations. Therefore, the industry needs to consider the application of fan-out PLP more holistically, including the use of more diverse substrates for panel-level packaging.

The strength of panel makers are the expertise in the process of glass substrates, including flexible and OLED-related metal substrates, as well as the capability of manufacturing devices on various substrates. This has been the core competency of panel makers. And as substrates get larger, specific flat panel process like thin-film process becomes more irrelevant. As Paul mentioned, micro LED transfer process, for example, is being developed in the panel industry. I think these are the capabilities of panel makers that can potentially align with the emerging packaging needs.

[Jerry Su, executive]

Thank you, Frank. Well, the next question is about silicon photonics alliance. Could you please provide some color around your participation in the alliance? Do you have any strategic plans for the silicon photonic business? Frank, would you also please answer this question?

[Fu-Jen Ko, executive]

Silicon photonics is different from packaging, because the packaging industry is very comprehensive. It's very mature as well. For panel makers to enter this field, besides the technical capabilities, we would also need to consider how we are going to position ourselves and how we're going to work with our industry partners. However, in terms of silicon photonics, we have observed new opportunities. As the rise -- with the rise of AI, there are new issues in the intercom between servers at high-speed computing modules.

Currently, for example, the use of copper wire for GPU chips and memory will cause bottlenecks for the bandwidth and heat solution. This is why silicon photonics or optics-based communication has become a new topic that everybody is very interested in. From the perspective as a panel maker, photonics has always been part of our expertise, and you're saying that we should perhaps explore opportunities in this new market. The reason that we want to get -- to be a part of the silicon photonics industry alliance is that we want to join hands with our alliance partners together, look for new opportunities to enter the market or to stimulate new specifications or road maps or technologies going forward. We also hope that potentially, we can develop ecosystem partnerships in advance. At the same time, we want to leverage our core competencies in the best technologies such as micro LED to expand our footprint in the silicon photonics area.

[Jerry Su, executive]

Thank you, Frank. Next question, what is the gross margin of your -- each of your 3 pillars? David, would you please?

[Po-Yi Chang, executive]

About the gross margins, as we have shared with you, the margin of Vertical Solution is higher than that of the Mobility Solution, which is higher than the Display pillar. Excluding some one-off factor, some analysts have estimated that over these few quarters, the gross margin of our Vertical and Mobility Solution ranges in the high teens percentage to low teens -- low 20s percentage. And the margin of Display pillar is ranging around single-digit percentage. That estimate is reasonable. Over the longer horizon, we will continue to improve the profitability of each of our product lines.

[Jerry Su, executive]

Okay. Thank you, David. Next question, could you please provide an update on the EV market conditions and provide an outlook for the 2025 automotive market? Frank, would you please?

[Fu-Jen Ko, executive]

For this year, global car sales is going to be about 88 million units, up by 1% or more Y-o-Y. This year, of course, the momentum of EVs is very, very strong. However, there is some decline because of a wider application in different areas. Under different weather conditions, some places may not have adequate charging facilities, and this has affected the penetration growth of EVs to some extent. However, we are still seeing very high growth rate in China in terms of the EV segment with Y-o-Y growth exceeding 30%. Looking ahead, the Chinese market is continuing to grow, whereas the U.S. market will likely be flattish. And in some regions with colder weathers, the use restrictions will increase. For example, in Europe, sales of EVs will likely experience some decline. So this is an overall outlook for the EV market.

As for the next year, we are expecting the global car sales to continue to grow, surpassing 90 million units. Today, EVs and internal combustion engine cars are increasingly digitized and interconnected. Plus, they are also using more and more smart cockpit solutions with bigger displays. Moreover, increasingly, smart cockpit solutions will be applied in different kinds of mobility platforms, including EVs, internal combustion engine cars and hybrid cars. At AUO , we will continue to advance our smart cockpit solution technologies and to develop and as well as advance our strategic goals.

[Jerry Su, executive]

Thank you, Frank. The last question is about the demand and market outlook for AI PCs. Could AUO please talk about whether you have secured new orders from your customers in this aspect? James, would you please?

[Chien-Pin Chen, executive]

This year, the NPU of AI PCs is still limited. There are only a few models that can achieve 40 TOPS. So the penetration rate of AI PCs should be smaller than 5%. However, going forward, the penetration rate of new AI PC products will continue to increase. This means that the panels that AI PC adopt will have to be more power efficient as AI PCs will consume more power for computing. The lower consumption panels will be produced by LTPS technology at a yield, which we believe will be much more efficient than OLED panels.

Moreover, AUO is driving designing advancements steadily. Today, we have secured more than 80% coverage across different brands. So we are expecting that with AI PC driving -- improving its penetration rate, our design-in projects will continue to increase as well. With the increased penetration rate of AI PCs, power efficiency requirements will also increase significantly to achieve a full-day application and use without charging. Because of this, the demand for LTPS displays will continue to increase. Thank you.

[Jerry Su, executive]

Okay. Thank you, James. This concludes our Q&A session. Thank you all for your listening. Also, this concludes today's investor conference. If you have any other questions after this conference, please feel free to contact us at the IR Department of AUO. Thank you very much. We will see you next quarter.