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Edited Transcript of 034220.KS earnings conference call or presentation 30-Jan-19 1:00am GMT

Q4 2018 LG Display Co Ltd Earnings Call

Seoul Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of LG Display Co Ltd earnings conference call or presentation Wednesday, January 30, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Lee

LG Display Co., Ltd. - Head of Market Intelligence Division

* Dong-Hee Seo

LG Display Co., Ltd. - CFO & Senior VP

* Heeyeon Kim

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

* Young-Kwon Song

LG Display Co., Ltd. - Head of Strategy & Marketing Group

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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

* Jong Woo Yoo

Korea Investment & Securities Co., Ltd., Research Division - Analyst

* Nicolas Gaudois

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

* Won Suk Chung

HI Investment & Securities Co., Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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(foreign language) Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the Fiscal Year 2018 Fourth Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions) Now, we shall commence the presentation on the Fiscal Year 2018 Fourth Quarter Earnings Results by LG Display.

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

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(foreign language) Good morning. This is Kim Heeyeon, in charge of LG Display's IR. On behalf of the company, let me thank all the participants at this conference call.

(foreign language) Today, I'm joined by the CFO, DH Seo; Young Kwon Song, in charge of the Strategy and Marketing Group; [SM Lim], in charge of Business Support; [J Kwon] of IT Marketing; Daniel Lee of Market Intelligence; team leader, Hyung-Seok Choi, of TV Marketing; and team leader, BJ Kim, of Mobile Marketing.

(foreign language) Today's conference call will be conducted for 1 hour in both Korean and English, starting with a presentation on the financial results of Q4 2018 and the company's outlook followed by Q&A.

(foreign language) Please refer to the IR presentation documents in the company's website for more details on the financial results of Q4 2018. For those joining through the webcast, please refer to the details on the widget on your screen.

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

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

(foreign language) With that said, we will now start with the presentation on Q4 2018 earnings results.

(foreign language) First is the financial performance of Q4. Revenue in Q4 was KRW 6.9478 trillion, up 14% -- up 14 percentage points quarter-on-quarter. Operating income was KRW 279.3 billion in the fourth quarter despite the fall in large product ASP, thanks to growing shipment of IT and medium- and small-sized products with higher blended area ASP.

(foreign language) Operating profit margin was 4% with EBITDA margin of 16%. Income before tax was KRW 234.2 billion and net income, KRW 152.6 billion.

(foreign language) Next is area shipment and ASP. (foreign language) Area shipment in Q4 was 11.05 million square meters, up 2% quarter-on-quarter. ASP was generally in decline, but blended area ASP rose to $559, up 12% Q-o-Q. This is due to change in the product mix, with growing shipment of IT and small to medium panels with higher blended area ASP.

(foreign language) The capacity in Q4 was 13.51 million square meters, unchanged Q-o-Q. OLED capacity is marked separately from Q4, and it is nearing 10% out of total capacity in the quarter.

(foreign language) As for the revenue share in Q4, mobile and other application share was 28%, up 7 percentage points Q-o-Q, thanks to mobile seasonality for small to medium panels and robust shipment in other applications such as auto and wearables. Notebook and tablet share also rose to 22%, up 2 percentage points Q-o-Q, on the back of growing shipment of high value-add products and the company's technological competitiveness in IT. This relatively reduced the share of monitors and TV at 14% and 36%, respectively.

(foreign language) Next is the company's financial positions and ratios. (foreign language) Inventory at the end of Q4 was KRW 2.6912 trillion, the value rose slightly Q-o-Q with the rise in share of high value-add products but inventory in days remained stable.

(foreign language) As for financial ratios, liabilities-to-equity ratio and net debt-to-equity ratio rose slightly due to mid- to long-term investment.

(foreign language) Cash flow at the end of Q4 was KRW 2.4434 trillion, down KRW 395.2 billion Q-o-Q due to continued investment into the company's shift to OLED.

(foreign language) Next is the company's guidance for 2019 first quarter. (foreign language) Area shipment growth in Q1 is expected to fall at a high single-digit percentage due to seasonality. As for blended area ASP, it is expected to fall at a mid- to high single-digit percentage, reflecting the panel price decline.

(foreign language) Next, Daniel Lee, in charge of Market Intelligence, will report on the supply-demand outlook followed by the new CFO.

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Daniel Lee, LG Display Co., Ltd. - Head of Market Intelligence Division [3]

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(foreign language) This is Daniel Lee, in charge of Market Intelligence. I will now present the company's outlook on the market dynamics and supply-demand.

(foreign language) For the supply side, the LCD industry in 2019 is again expected to see double-digit growth due to increase in Chinese panel makers' investment as it did in 2018.

(foreign language) On the other hand, there is growing volatility in the demand and market for major display products, including TV, due to such macroeconomic uncertainties as global economic slowdown, U.S.-China trade friction and FX risks in emerging economies, along with the base effect in developed markets with high growth last year.

(foreign language) Amidst the environment, panel price has shown downward trend from Q4 2018. If we consider demand and supply dynamics in [CRE] only, it seems hard to forecast a positive panel price trend in 2019.

(foreign language) But in reality, each supplier's fab operation and differentiation strategy are expected to have a bigger impact on the panel price, than supply and demand. Thus, the price movements are likely to be different by product and size.

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

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(foreign language)

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Dong-Hee Seo, LG Display Co., Ltd. - CFO & Senior VP [5]

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(foreign language) Good morning to the shareholders, investors and analysts from home and abroad. This is LG Display's new CFO, DH Seo. I'm very pleased to have the chance to greet everyone through this conference call since taking office December last year.

(foreign language) As the new CFO, though I feel the weight of projects lined ahead of us, I am more excited about the new opportunities we can create with the hard work and achievements that LG Display has built up over the last few years. And I am much hopeful of the diversified world of display that we will lead into.

(foreign language) I feel a great sense of responsibility as we need to keep boldly preparing for the future with preemptive investment even with oversupply coming from China while addressing the issues associated with our business, shifting process. I will find the balance between opportunities and risks and keep supporting LG Display's transformation into the future.

(foreign language) As the new CFO, before presenting the company's strategy, I wish to share the story of the bar-headed goose migratory birds that fly over the Himalayas, which is the world's highest mountain.

(foreign language) The bar-headed geese, also known as Indian geese, migrate to Southeast Asia over the Himalayas to avoid the winter. Their preparation for this migration is known to be quite remarkable, not only do they fly straight over the Himalayas instead of going around at a lower altitude, they go through the painstaking preparation of reducing their body mass.

(foreign language) And if the leader of the V formation struggles with the headwind, another goose takes over so that no one will be left behind.

(foreign language) It is such teamwork and unity and focus on the goal that are known to make such difficult journey at extreme altitude successful.

(foreign language) Dear shareholders, investors and analysts, for LG Display, there is also the Himalayas that we must overcome, and we will overcome with rigorous preparation and focus on the goal.

(foreign language) As a CFO, I will focus on the following 3 tasks: (foreign language) First is innovating our business fundamentals. The OLED revenue share in our business portfolio is expected to reach 30% this year and close to 50% in 2021. We will solidify our leadership in the market with OLED as its share and importance grow and keep generating new value to our customers.

(foreign language) We will first focus on differentiation and profitability as our utmost priority. In the meantime, we will continue working on our core competitiveness in customer, products and cost.

(foreign language) As for LCD, our approach will be certainly different from the past. We will improve operational efficiency and focus more on profitable areas.

(foreign language) Second is better efficiency across the enterprise. (foreign language) We will minimize assets and expenses unrelated to business activities to improve profitability in new businesses and minimize mismatch between resource input and output. All activities of the company will focus on value creation. (foreign language) And through a select and focused approach, we will make sure that resources efficiently flow into areas that create value-add. (foreign language) In the end, the push to innovate our business fundamentals and operational efficiency will help solidify our financial fundamentals.

(foreign language) As you are aware, LG Display's borrowing has increased considerably compared to the past, and investment will continue in 2019. High CapEx spending in such difficult circumstances is an inevitable challenge we must accept to prepare for the future.

(foreign language) We will do our best to complete our CapEx spending in 2019 to differentiate and transform our business portfolios into a sound structure that allows the company to generate stable profitability despite fluctuations in the display market. Based on this, we will consolidate our financial structure.

(foreign language) Dear shareholders, investors and analysts, as the bar-headed geese reduce their body mass and thoroughly prepare for their tough travel over the Himalayas, LG Display will proactively prepare for the future while pushing towards organizational innovation and operational efficiency at the same time.

(foreign language) It promises to be a challenge, but LG Display will keep striving to be a great company that can thrive in the display industry where opportunities abound, along with fierce competition. Thank you.

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

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(foreign language) That brings us to the end of earnings presentation for Q4 2018. We will now take questions. Operator, please commence with the Q&A session.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Kim Dongwon from KB Securities.

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Dongwon Kim, KB Securities Co., Ltd., Research Division - Analyst [2]

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(foreign language) I have 2 questions. And first is about the impact of your competition's increased investment into the QD-OLED and the entry into the market. So what do you believe is going to be the impact on your company's OLED business? And then the second question is about the TV market as well as the technology. So now in the next 3 years, it seems as if now because of the Chinese suppliers' 10.5 Gen, it seems as if now they are going to have the 70- to 80-inch ultra-large TV with 8K resolution. And then currently, with your 8.5 Gen OLED technology, so do you believe that you will be able to have an efficient transition into the mass production for the 8K with the MMG technology? And also, so basically, then how do you intend to improve the efficiency of your production of 70- to 80-inch products for a Gen 8?

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Young-Kwon Song, LG Display Co., Ltd. - Head of Strategy & Marketing Group [3]

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(foreign language) This is Young Kwon Song of Strategy and Marketing, and I would like to answer the first question, which was on the impact coming from the competition's entry into the QD-OLED. (foreign language) Now I'm sure that you would know that the QD-OLED basically is similar technology to the company's white OLED which is self-emitting. So I believe that if we were having the -- if we were the only company with the OLED, then if there is competition coming in with QD-OLED technology, then I believe that it is good in terms of enlarging the OLED ecosystem and also invigorating competition. (foreign language) And the second question I believe was that given the fact that some suppliers are now -- will be producing ultra-large size at 10.5 Gen, will it be possible for the company to produce large OLED with 8.5 Gen and with 8K resolution? (foreign language) Now then before responding to the question about the large size, let me first expand a bit about the 8K. So we have already demonstrated 8K resolution using OLED technology. So -- at the CES. So we have already secured our proprietary technology for producing OLED at 8K. (foreign language) So that means that depending on the customers' needs, we already have the responsiveness to produce 8K resolution using OLED. And then now whether we will be able to produce a large OLED at 8.5 Gen instead of 10.5 Gen. Well, based on our LCD technology, we already have the technological basis to produce large OLED.

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

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(foreign language) And this is Kim Heeyeon, in charge of IR, let me give a further explanation. Now for the company, we believe that the move to larger size TV and to the 8K resolution is a given. So for the company, we are making preparations so that we will be able to respond to the trends in a timely manner. (foreign language) And down the road, we believe that the customers' needs on the TV market are going to become even more diverse. So for example, in terms of the larger size and also higher resolution. Not only that, also the design and better functionality as well as space freedom. (foreign language) So going forward, not only the already launched wallpaper TV and also the Crystal Sound OLED and the rollable TV, but we will also try to provide better and more diversified value to the customers by introducing our ultra-size 8K as well.

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Operator [5]

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(foreign language) The next question will be provided by Yoo Jong Woo from Korea Investment & Securities.

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Jong Woo Yoo, Korea Investment & Securities Co., Ltd., Research Division - Analyst [6]

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(foreign language) I have one question. And first is about your outlook on the plastic OLED demand. Then also, in terms of the capacity, it seems as if there is going to be a capacity increase in the second half of this year. So what is your plan for the capacity for the year? And also, what is your outlook on demand-supply?

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Daniel Lee, LG Display Co., Ltd. - Head of Market Intelligence Division [7]

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(foreign language) This is Daniel Lee from Market Intelligence, and I believe that your questions were pertaining to the demand and the supply-demand dynamics for plastic OLED in 2019. (foreign language) The first about the demand outlook for plastic OLED in -- or for -- demand outlook for plastic OLED. In 2018, out of the 150 million-or-so units of smartphones, plastic OLED accounted for about a little over 10%. And this year, we project it to be around 14%. (foreign language) And regarding the outlook on supply-demand, it is difficult to say for sure at this point, but then depending on the demand coming from the market as well as the customer needs and our fab operation plans, we will make sure that we have our operation plan with flexibility in accordance to the customers' needs as well as the market demand.

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Operator [8]

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(foreign language) The following question will be provided by Nicolas Gaudois from UBS.

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Nicolas Gaudois, UBS Investment Bank, Research Division - MD, Head of APAC Technology Research and APAC Technology Strategist [9]

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First of all, you just provided an indication that OLED revenues could be about 30% of total revenue in 2019. So with that, could you clarify a little bit what to be the pace of progression of capacity for both white OLED and for RGB OLED as well throughout 2019 to basically reach these targets? And secondly, could you update us as well on your latest view for capital spending for 2019 and maybe additional view for 2020 and how this is split by the different categories, between white OLED, RGB and other. (foreign language)

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Dong-Hee Seo, LG Display Co., Ltd. - CFO & Senior VP [10]

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(foreign language) This is the CFO speaking. The first, the capacity for white OLED, at the Paju plant, currently, it is 70,000 per month. And then now in China, in our China plant, we are planning to increase this to 60,000 by the third quarter of this year. So in all, it would be around -- it will be up to 130,000 within the year. And then for the plastic OLED, currently, it is 45,000. And then in terms of the additional capacity, we are making the preparation according to the investment planning in the Chinese plant, and that would be for an increase of 30,000. But that is not going to be within this year but then we'll be making the preparation, and perhaps will -- that will be done sometime next year. (foreign language) And your -- regarding your second question on CapEx. Our plan for CapEx this year is around KRW 8 trillion as we had communicated for some time, but then we believe that most of the large-scale investments would be completed by this year. So next year, our guidance for CapEx would be KRW 4 trillion. (foreign language) And also, you asked about the CapEx share between white OLED and plastic OLED. And we -- the guidance is about 60% for the TV side and 40% for plastic OLED.

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [11]

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(foreign language) And to give you further information, the capacity ramp up for TV OLED is planned for the plant in China, and the mobile plastic OLED, that's in Korea.

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Operator [12]

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(foreign language) The following question will be provided by Woo Dong-je 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) My first question goes to the CFO, which is about the cash flow. So in 2019, your guidance for CapEx is KRW 8 trillion, which is similar to last year's level. But then if there is no improvement in EBITDA, including the operating income, as well as the depreciation and amortization cost, then I believe that the shortfall for the CapEx would have to come from the outside. So that is going to be close to KRW 2 trillion. So how do you plan to finance for the close to KRW 2 trillion from the outside? And in such a case, don't you believe that the cost of funding would be -- would weigh down on your nonoperating side? So if I can get your answer to the first question, then I will follow up with the second question.

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Dong-Hee Seo, LG Display Co., Ltd. - CFO & Senior VP [14]

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(foreign language) Yes, this is the CFO. And yes, I can see that there are some concerns outside the company about LG Display's cash flow, so this is a good opportunity for us to clarify the situation. (foreign language) So we have already given the guidance for CapEx in 2019 at KRW 8 trillion, and the depreciation and amortization would be over KRW 4 trillion, which is going to be similar to last year's level. So yes, on one hand, there is expected depreciation and amortization at KRW 4 trillion. And then as I'm sure you have already seen through the media reports, we have already secured syndicated loan from China last year at KRW 3 trillion, and the cash injection will begin this year. (foreign language) So for the investment, which would require the largest amount, which is in China, we already have secured the investment capital. And then for the rest, we already have prepared the financial mechanisms to make up for the shortfall wherever it occurs, so that we will be able to execute it in a timely manner. So even in the worst-case situation, we already have the means to respond to the situation accordingly.

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

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(foreign language) And then -- my second question is about the plastic OLED mass production. So I believe that for the company, the real differentiating point would be how you can utilize the Gen 6 line for the new smartphones because you already have the know-how for mass production for plastic OLED that you have already achieved from the OLED TV. So my question is then for the Gen 6 line for plastic OLED, when do you believe that this will be ready for mass production, and when do you believe that you will be able to reach the breakeven point?

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Dong-Hee Seo, LG Display Co., Ltd. - CFO & Senior VP [16]

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(foreign language) Regarding -- so this is the CFO speaking. Regarding the -- your question on plastic OLED, now because it is also directly related to the customer situation, please understand that I cannot specify the timeline. But what I can tell you is that it would be possible in the near future. And also, in addition, regarding the plastic OLED, we are focused in the development on mobile and TV as well as auto. So particularly with auto, we believe that we'll be able to see something meaningful by the end of this year. (foreign language) And regarding your question on when we will be able to reach the breakeven point. Because of the difficult -- because of the various factors at play in the situation today, please understand that it's difficult to pinpoint the timeline.

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Operator [17]

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(foreign language) The last question will be provided by Chung Won Suk from HI Investment & Securities.

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Won Suk Chung, HI Investment & Securities Co., Ltd., Research Division - Analyst [18]

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(foreign language) I have 2 questions. First is about your OLED TV shipment guidance for this year. So considering the operation of your Guangzhou plant in China in the second half of this year -- so last year it was around 3 million units. So for this year, how -- what do you believe is going to be the shipment for OLED TV? And then the second question is, it is already reported through the media that in the fourth quarter, you had received applications for voluntary retirement. So I wonder whether this has been reflected as a one-off event -- one-off cost in addition to the operating income. So if it has been reflected, then how much?

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Dong-Hee Seo, LG Display Co., Ltd. - CFO & Senior VP [19]

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(foreign language) Regarding your first question about the OLED TV shipment, our plan for this year is 3.8 million units. And with that then, the contribution to revenue would be -- OLED TV would take up to 30% out of the total TV revenue. And of course, we have continued with the efforts last year and into this year, but what we see is that our customers are now trying to position themselves in the high-end market. And of course, the company is aligned with our customers, so we would be -- so that we will able to have a win-win result for the -- for both the company and the customers. (foreign language) And regarding your second question about one-off expenses, now we see that in every fourth quarter, so around December, then there are bound to be one-off expenses or one-off income. (foreign language) And likewise, last year, so in the fourth quarter last year, again, we have seen both the one-off expenses and one-off income, and the -- some of them are not enough to reassess our earnings results. In other words, the one-off expenses and one-off income pretty much offset each other and resulting in the operating income that we have reported.

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Heeyeon Kim, LG Display Co., Ltd. - Head of IR and VP [20]

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(foreign language) And now we are going to answer the question that we have received online. (foreign language) And this time again, we received a number of questions not only from minority shareholders but also analysts and institutional investors. (foreign language) Many of them have been answered already, and we will conclude with 1 question on flexible OLED.

(foreign language) So this is a question from an investor, and it was on whether flexible OLED will be a killer item if applied to the smartphone and what are other applications aside from the smartphone for which the flexible OLED can act as a killer item. (foreign language) One of OLED's biggest strengths is design flexibility, which allows it to be applied on small applications like wearables and smartphones as well as automotive and large applications. And we understand that already in the high to the small and medium application market, a number of different products using the design flexibility are waiting to be launched. (foreign language) LG Display has already unveiled the rollable TV using design flexibility. The company also believes that display products using this form factor will play a meaningful role in the auto market. We have been expanding our OLED business in the auto market, and some meaningful results will be shown in the near future. (foreign language) The company will plan and execute a broad range of OLED portfolio that will include small, medium applications such as auto as well as large applications so that we can accomplish the kind of competitiveness that no one else has achieved before.

(foreign language) With that, we will now close Q4 2018 Earnings Conference Call. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.