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Edited Transcript of 034220.KS earnings conference call or presentation 25-Jul-18 1:00am GMT

Q2 2018 LG Display Co Ltd Earnings Call (English, Korean)

Seoul Sep 17, 2018 (Thomson StreetEvents) -- Edited Transcript of LG Display Co Ltd earnings conference call or presentation Wednesday, July 25, 2018 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Don-Sang Kim

LG Display Co., Ltd. - Direcor, Executive VP & CFO

* Heeyeon Kim

LG Display Co., Ltd. - Head of IR and VP

* Matthew Kim

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Conference Call Participants

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* Dong-je Woo

BofA Merrill Lynch, Research Division - MD and Tech Analyst

* Dongwon Kim

KB Securities Co., Ltd., Research Division - Analyst

* Jung Hoon Chang

Samsung Securities Co. Ltd., Research Division - Head of Small Cap

* Nicolas Gaudois

UBS Investment Bank, Research Division - MD, Head of APAC Technology Research and APAC Technology Strategist

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Presentation

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Operator [1]

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(foreign language) Ladies and gentlemen, welcome to LG Display's Second Quarter of 2018 Earnings Release Conference Call. We will begin with the presentation, followed by a Q&A session. (Operator Instructions) Now we will start the presentation. I hand over to the speaker. Ma'am, please begin.

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [2]

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(foreign language) Good morning. Thank you for joining LG Display's Q2 2018 Earnings Conference Call. I am Heeyeon Kim, Head of IR.

(foreign language) Participants of today's call include CFO, Sang Don Kim of LG Display; DuckYong Kim, Head of Corporate Business Management Division; Matthew Kim, Head of Market Intelligence; Stephen Ko, Head of TV Marketing; JY Kwon, Head of IT Marketing; [KY Jin], Head of Mobile Marketing.

(foreign language) Today's earnings presentation will last around 1 hour in both Korean and English. There will be a presentation on the company's financial performance in the second quarter of 2018 market outlook which will then be followed by a Q&A session.

(foreign language) Please refer to our website and attachment to our disclosures for more detail regarding Q2 results, and for those of you joining us via the webcast, please refer to the references in the widget on the bottom left corner.

(foreign language) And also, before we begin the presentation, please take a moment to read the disclaimer.

(foreign language) Please also note that today's results are based on consolidated K-IFRS standards prepared for your benefit and have not yet been audited by an outside auditor.

(foreign language) With that said, our CFO, Sang Don Kim, will now begin the presentation on Q2 2018 earnings results.

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [3]

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(foreign language) Good morning. I am Kim Sang Don, CFO of LG Display.

(foreign language) I extend my sincere gratitude to shareholders, analysts and investors who are joining us for LG Display's Q2 2018 Earnings Release Conference Call.

(foreign language) And looking back first half of 2018, apart from off seasonality we have traditionally experienced, there was growing supply from China in 2018, which led to steeper-than-expected panel price declines in the market and a tough market environment ensued.

(foreign language) The company had made projections that downward trend of panel price which continued from the latter half of last year will start to stabilize during the first half of this year, but with aggressive pricing from Chinese competitors and conservative purchasing manner taken on by the set makers, first half panel price has shown steeper and faster-than-expected decline.

(foreign language) However, on higher-than-expected Q2 TV sales and reduction in channel inventory, in combination with seasonal characteristics of the second half of the year and the customers' move to inventory restocking, as we enter July, we are seeing price uptrend from certain sizes.

(foreign language) Market is moving favorably, but there is still high level of volatility and uncertainties, and we note that the current situation is going to be clearly different from the demand and supply cycle we've seen in the past in the display industry.

(foreign language) We believe this panel price improvement is temporary, driven by a mismatch in demand, supply for product and industry efforts to preserve profitability. We consider structural oversupply and asymmetrical competition to be an inevitable trend for the display industry as we go forward.

(foreign language) As we expect greater market volatility, the company will take on a shrewd and conservative approach and manage our strategic stance and short-term operations in a balanced manner.

(foreign language) With that, let me move on to Q2 results.

(foreign language) Q2 revenue was down 1 percentage point Q-on-Q to KRW 5,611,200,000,000. ASP decline was bigger than expected, and conservative purchasing policies of set makers added to lower panel shipment, which amounted to Q2 operating loss of KRW 228.1 billion.

(foreign language) Q2 area shipment was up 2% Q-on-Q reporting 10.26 million square meters. The underperformance against expectation was driven by conservative purchasing by set makers amid sharp declines in ASP. ASP per square meter was down 4 percentage points Q-on-Q.

(foreign language) Q2 capacity was up 2% Q-on-Q reporting 12.85 million square meters.

(foreign language) Looking at Q2 product mix, mobile and others accounted for 22%; notebook and tablet, 19%, similar to last quarter's levels; and monitor was 17%; TV, 42%. Despite significant fall in panel ASP, TV mix was down only 1 percentage point Q-on-Q due to expanded share of OLED TV. Monitors' share of the revenue increased 1 percentage points, driven by sizable increase and Q-on-Q shipment.

(foreign language) Next is on the financial position and key indicators.

(foreign language) Inventory, as of Q2 end, was up Q-on-Q, reporting KRW 2,430,300,000,000. This is driven by increase in high value added products like the OLED TV and strategic inventory buildup for LCDs and P-OLED smartphones for the purpose of responding to mobile peak seasonality.

(foreign language) In terms of financial ratios, driven by strategic CapEx increase following mid- to long-term transition into OLED business, there was increase in borrowing which led to higher liabilities and net debt to equity ratio. (foreign language) For the cash flow, with continuing investments, cash as at Q2 end, was down KRW 299.3 billion Q-on-Q, reporting KRW 3,197,600,000,000.

(foreign language) Let me now move on to Q3 guidance.

(foreign language) Q3 area based shipment is projected to go up mid-single digit Q-on-Q. As we enter peak season and with higher-than-expected Q2 sell-through, we expect coming through of orders for inventory restocking.

(foreign language) This will drive up panel ASPs in certain sizes, and as such, we expect more positive ASP trend compared to Q2. However, the price uptrend, rather than it being across the board, will differ depending on demand and supply by product and size as well as profitability.

(foreign language) On positive TV panel ASP trend and higher shipment for mobile, which has higher ASP per unit area, we expect ASP per square meter to rise mid-single digit.

(foreign language) Next is on the company's strategic direction.

(foreign language) First, for LCD. Just as we are seeing good performance in the high-end segment of IT through differentiated technologies, such as narrow bezel, IPS, borderless and oxide, whilst the IT industry itself is recording a negative growth, for TV, we plan to aggressively shift product mix around the high value-add segment where we have the strength as in ultra large size in commercial products.

(foreign language) Under this operational principle, we've been discussing the specifics of the rationalization plans for certain LCD capacity. We are reviewing the timing of execution, and we'll communicate with the market once that time comes.

(foreign language) Second is the OLED segment. In Q3, we expect OLED TV turnaround recording a profit, and we plan to actively drive large-size OLED market going forward by utilizing OLED fab in China whose approval was rendered early July.

(foreign language) Although the approval for the China fab was belated, mass production will continue as scheduled. And for 10.5 Gen process in Korea, we plan to go directly to OLED after making adjustments to timing and size. Also, additional Gen 8 OLED capacity is being considered in line with the LCD rationalization.

(foreign language) For plastic OLED, we will make preparations for the future attentively under the recognition that it is a strategic technology essential for various markets spanning from mobile to auto display.

(foreign language) E61 will enter mass production from the second half of this year. E62 will run according to demand, so we will closely monitor plastic OLED demand for next year, so that we may control uncertainties.

(foreign language) In particular, auto project is one of the key strategies for the future. We are seeing a growing need for plastic OLED in the auto market, underpinned by the anticipation that it can bring differentiation unseen from LCD. And based on the outcome of efforts we've put in so far over the years into the auto business, we will embark on this business in the second half of next year.

(foreign language) Currently, out of the auto order backlog, OLED business accounts for upper 10%, and on this, as the basis, we will introduce diverse portfolio in the small to medium OLED lineup so as to ensure stable operations.

(foreign language) Lastly, on our investment strategy.

(foreign language) We are aware that the market is concerned about how we will fund for future investment on the back of worsened business environment in the first half of the year. To alleviate such concerns, I would like to take this opportunity to explain on the company's CapEx and the funding plan in detail.

(foreign language) Since the announcement of the mid- to long-term investment plan in 2017, the speed and extent of changes from the market was quite significant. So from a mid- to long-term perspective, we would bolster our stance towards OLED shift, but have adjusted the timing and size of investment and have cut around KRW 3 trillion in CapEx up to 2020. As uncertainties rise in the mobile industry, it seems conservative approach would be better to take, and plus, we will be working on 10.5G OLED from the hybrid fab adjusting the LCD investment.

(foreign language) Looking at how we funded for KRW 4 trillion of CapEx spending up to the first half of this year, 60% was from depreciation, working capital management and et cetera, and 40% was debt financing.

(foreign language) So for the 2-year period from 2018 to '19, total CapEx is expected to be KRW 16 trillion, with more than 70% funded through depreciation and internal working capital management and the rest will be through debt financing. Half of the debt financing will be done in connection with the local subsidiaries, the OLED plant in China and other overseas plants. Remaining half will be from the domestic market, and majority of the financing has been already complete.

(foreign language) And from 2020, investment will fall significantly below the level of EBITDA.

(foreign language) In light of uncertainties and volatilities in the industry, the company will set aside necessary resources required for the coming 2 years with a buffer of more than KRW 1 trillion against the budgeted CapEx for the purpose of risk and opportunity management.

(foreign language) And I assure you once again that we are not considering any equity funding, which the market is concerned about.

(foreign language) LG Display will be thorough in preparing for and implementing various OLED portfolio, so that we can clearly differentiate our competitive edge against our peers. Thank you.

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [4]

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(foreign language) That brings us to the end of the presentation on Q2 2018 earnings results. I would like to ask the operator to please conduct the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) Our first question is from UBS, Nicolas Gaudois. (foreign language)

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Nicolas Gaudois, UBS Investment Bank, Research Division - MD, Head of APAC Technology Research and APAC Technology Strategist [2]

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First one is on the potential rationalization for LCD capacity. So could you maybe clarify a little bit what are the options still on the table? I think you just talked about possible conversion of Gen 8.5 capacity from LCD to OLED. Secondly, are you still considering closing down purely and simply Gen 8.5 LCD capacity? And thirdly, are you reviewing your capacity utilization rates into the back end of the year since, as you suggested earlier, it is possible the current recovery we're seeing is reasonably short term? And I've got a follow up.

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Unidentified Company Representative, [3]

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(foreign language)

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [4]

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(foreign language) Let me first respond to the question about LCD rationalization. The way we understand the current market is that the pattern that we see at this point may be of a different characteristics compared to the past LCD cycles we have witnessed. (foreign language) So as that as the very premise of our rationalization discussions, we have been in discussions with respect to how we could further strengthen our relationship vis-à-vis our strategic customers and also we talked about whether it will be possible to bring about cost competitiveness from our fabs as well as potential for enhancing product competitiveness. So those 3 were key pillars that were the topics of our discussion. (foreign language) And obviously one of the key aspects of the rationalization plan should include adjusting the capacity for certain products that have low profitability.(foreign language) So currently, if you look at our Paju complex, we have P7 and P8 plant that's producing TV panels. As I've mentioned in my presentation, we are planning to focus on ultra large-size and commercial product. And when it comes to low competitive LCD capacity, we are considering converting that to OLED and also have reviewed many different options that could bring this rationalization of LCD production. (foreign language) So when you make the conversion from LCD to OLED capacity, basically that process will take within or less than 1 year, and the size of the investment would, of course, differ, but we believe that it will be below the level of KRW 1 trillion. So these are aspects that you consider when you make that decision to convert. There are multiple different options that we have been preparing for and have been considering, and we are closely looking at, as I mentioned during my presentation, the most appropriate timing for execution. And once that time arrives, we will immediately communicate with the market.

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Nicolas Gaudois, UBS Investment Bank, Research Division - MD, Head of APAC Technology Research and APAC Technology Strategist [5]

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Very helpful. Just as a quick follow up, KRW 1 trillion of -- or lower of CapEx for possible conversion, I mean, would I be right to think that, that would imply a reasonably minimal possible conversion? I mean, if I do a quick back of the envelope KRW 1 trillion or lower of CapEx for conversion from ASI LCD to oxide OLED, that will probably give you maximum 30,000 sheets of Gen 8.5 OLED capacity.

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [6]

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(foreign language)

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [7]

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(foreign language) So I believe that it is too premature for us to give you any specific execution-related information. Internally, we believe that it could maybe be over 35,000 sheets, but -- and also in terms of the investment, the timing and the size, these are the aspects that we are very closely making preparations on and that process is ongoing, and it's too early to give you any specifics.

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Operator [8]

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(foreign language) Next question is from KB Securities.

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Dongwon Kim, KB Securities Co., Ltd., Research Division - Analyst [9]

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(foreign language) I have 2 questions I would like to ask. In your view, how long do you think that this LCD panel price rebound is going to continue? And what is your company's current plan when it comes to the LCD panel price strategy for the second half of the year? And also, I would like to understand, would we be able to see some meaningful outcome and result with respect to the topic of the LCD panel cross purchasing with the TV business unit of Samsung Electronics? My second question is, you have mentioned that you're considering to convert your 8 generation LCD lines to OLED and you've said that, that would take around less than 1 year. In light of all of that, then I think that we would have to see overall strategic direction of your OLED business materialize within this year, can you provide some more color on this aspect? And also, we see that small to medium P-OLED is facing a fiercer competition, so there seems to be some uncertainties related to the demand. What are your plans to actually break through those uncertainties? What are the solutions that you have?

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Matthew Kim, [10]

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(foreign language) I am Matthew Kim, in charge of MI, Market Intelligence. I would like to respond to your first question about the rebound of the panel price. (foreign language) Now as our CFO has previously mentioned, compared to our original expectation, it is correct that these -- the ASP price of the panels have actually declined in a much steeper and faster manner. (foreign language) So first off, we are hoping for and expecting for a recovery from such steep decline. (foreign language) And secondly, if this was like the past cycles, such trend would continue for around 6 months. (foreign language) But because the extent of the changes that we have witnessed have been quite significant, unlike the past patterns, we want to stick to, adhere to a more conservative approach.

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [11]

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(foreign language) As I'm the CFO, I will respond to the other questions about your other question had to do with our business relationship with a certain Korean company. Currently, I can say that productive talks are ongoing, but it will be difficult for me to disclose any specifics. (foreign language) Your third question has to do with when will we make the decision to actually make the conversion of the Paju LCD fab. As I said, it will take us about 1 year for the process. So within this year, it will be some point within this year where we would have to reach a decision.

(foreign language) Thirdly, your question on plastic OLED. As I've mentioned multiple times, when it comes to small to medium P-OLED business, we are a follower. So a very critical decision-making point for us is how to hedge any potential business risk. (foreign language) And therefore, of course, we would have to be very conservative when we make this investment-related decision, and also, we need to be able to further enhance on our internal capabilities when it comes to the technical aspects like the yield and the production-related elements. (foreign language) And also, apart from the smartphone application, we need to think very hard as to how we could expand the application, for instance into the panels in the auto application. So this is a very critical business point, and we're at this point very much focusing our internal capabilities on these areas.

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Operator [12]

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(foreign language) Our next question is from Bank of America Merrill Lynch.

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [13]

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(foreign language) I would like to post 2 questions. First has to do with your second half CapEx and the second question has to do with your OLED TV strategy. For -- if I look at your CapEx size, it's about KRW 8 trillion to KRW 9 trillion every year. And so over the coming 2 years, it would be in the amount of KRW 16 trillion. Now for the second half, I would think that it's all about making investment into the China fab, the building and also making CapEx facility investment, equipment investment for P-OLED. So I would like to understand in the second half of the year, where would you be actually focusing and funneling your CapEx budget. And later, I will ask questions about the OLED TV.

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [14]

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(foreign language) As I said at the very beginning, the first half capital -- CapEx spending amounted to about KRW 4 trillion, and in the remaining period, we would be spending about the same level of investment. In 2018, on a cash out basis, the CapEx will be around KRW 9 trillion. Of course, internally, we would be putting some more efforts to make certain savings. When it comes to the funding aspect, we do not believe that there's any funding-related issues. And as I've said at the very beginning, we have almost completed the requirement or the amount that we needed through debt financing. That process has been almost complete.

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [15]

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(foreign language) My second question is on OLED TV. In 2019, basically, you're strategically trying to increase the production of the OLED panels, and most of that will also come in through the China fab, the newly built China fab in 2019, and this whole production will come under full swing starting 2020. Because we are now seeing trade-related friction and dispute between China and United States, there could be some certain sales-related risk for the OLED TV panels that were manufactured in China. For instance, the risk of being levied with high level of tariff. So considering all of these factors, can we still expect that your OLED TV volume for this year and next year, can it continue to grow to -- from 3 million to 4 million to 5 million?

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [16]

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(foreign language) Our current plan is that when it comes to the OLED large-size TV panels, we're planning for 4 million in 2019, 7 million in 2020 and 10 million in 2021. And we are in the process of getting the production capacity to support this demand and one of that effort is the China fab. (foreign language) And as you would already know, our OLED customer base is comprised of LG Electronics, Japanese companies and global companies based in Europe as well as TV set makers companies in China. (foreign language) We are clearly aware of the potential risk when it comes to the uncertainties and volatilities that may come up -- that may come out of the market backdrop. And -- but it is possible for us to make geographical adjustments by making use of the fabs in Paju and China.

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Operator [17]

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(foreign language) Our next question is from Samsung Securities.

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Jung Hoon Chang, Samsung Securities Co. Ltd., Research Division - Head of Small Cap [18]

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(foreign language) I would like to ask 2 questions, one on LCD, the other one on OLED. To the previous question on what your view is when it comes to how you see this rebound in the cycle to continue, you said that currently, the market backdrop and the industry backdrop, the changes that you see is quite significant. But that difference that you see from the current trend and the past cycles, is it more on the demand side, meaning, the demand from the set companies? Or is that more from the supply side? Is it due to the difference in the capabilities of your competitive peers or their potential? That's my first question. Second question is on the OLED side. For P-OLED, the mass production process has actually been embarked on, and for -- and what timing -- and what is the timing for us to be able to understand that, the level of such production has actually reached a stable level? When can we make that judgment?

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [19]

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(foreign language) As you would appreciate, the different elements and factors that comprise supply and demand, it's not just the demand -- supply side, but also the demand side that actually plays a role, the demand from the set makers as well as the profitability of the set makers as well as the panel companies. So these are very dynamic. (foreign language) And it is also impacted by the supply and demand of the components, the parts and components. So this is an industry that is impacted by all of these different factors so it will be quite difficult for me to just designate one specific factor that has the biggest impact. (foreign language) And also, because we're experiencing a migration to bigger sizes on the demand side and there is that fluctuation and volatility coming from the size migration and also there is change in the purchasing power, so how the purchasing power actually impacts the trend is another factor. So from the company's perspective, it will be very difficult for us to just give you a one factor.

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [20]

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(foreign language) Responding to your second question, we consider the timing when E61 actually commences its mass production to be the point in time where we could have some visibility of our business. (foreign language) And E61 is going to begin its mass production early Q4.

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Operator [21]

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(foreign language) Our next question is from Arete Research.

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Unidentified Analyst, [22]

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(foreign language) Yes, my question has to do with how you view the LCD market going forward. If you look at the semiconductors and other industries, there had been a bit of a consolidation, but if you look at the LCD sector, if you include even the small players, we have about 15 entities or players that are vying for the market, but we haven't seen much consolidation or we haven't seen any consolidation in this industry. But now the Chinese companies are very aggressive in making investments, so do you think that you will soon see some industry consolidation? Or is LCD industry totally different? What is your view on the big picture?

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Matthew Kim, [23]

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(foreign language) Yes, I'm the Head of Market Intelligence. Even in the past, it's too far fetched to say that there had not been any case. When smaller fabs were faced with difficulties, there were some restructuring that went -- that took place. And due to the aggressive investment of the Chinese fabs, the fabs that do not have competitive edge and the companies that really lack competitiveness, there may be potential for restructuring.

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Don-Sang Kim, LG Display Co., Ltd. - Direcor, Executive VP & CFO [24]

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(foreign language) Yes, I'm the CFO. Let me just add on top of that, the LG Display's viewpoint as a company. Basically, I -- although cautious, basically our view is that the LCD industry, for the time being, is going to be structurally in an oversupply position. But regardless of any fluctuations or volatilities in the LCD market, we are going to be very steadfast, and we will very quickly converge to being strategic -- the OLED positioning. Then you would ask, what about the LCD? We are going to very quickly also shift by focusing on the areas where we have a differentiating competitive edge from cost competitiveness, and be at a position where we could actually be generating cash.

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Operator [25]

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(foreign language) (Operator Instructions)

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [26]

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(foreign language) Thank you very much. Since there are no further questions, we would like to close the Q&A session. This quarter, we have received questions through our website from many of our minority shareholders. They've asked us when the top 3 questions that we've received had to deal with reduction in production of LCD, the demand and supply situation and the timing of the POE-related plans. We will try to respond to those questions. And with that, I would like to now close our second quarter 2018 earnings presentation. Thank you.

(foreign language) So once again, thank you very much for joining us. If you have any other questions, please do contact us at our IR team. Thank you.