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Edited Transcript of 034220.KS earnings conference call or presentation 30-Jan-20 11:30pm GMT

Q4 2019 LG Display Co Ltd Earnings Call

Seoul Feb 2, 2020 (Thomson StreetEvents) -- Edited Transcript of LG Display Co Ltd earnings conference call or presentation Thursday, January 30, 2020 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dong-Hee Suh

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

* Heeyeon Kim

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

* Matthew Kim

LG Display Co., Ltd. - VP of TV Marketing

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Conference Call Participants

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* Chuljoong Kim

Mirae Asset Daewoo Securities Co., Ltd., Research Division - Research Analyst

* Dongwon Kim

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

* Sang Ryul Kwon

DB Financial Investment Co., Ltd., Research Division - Team Leader

* 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 2019 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 2019 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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[Interpreted] Good afternoon. 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.

Today, I'm joined by the CFO, DH Suh; Seung Min Lim, in charge of Corporate Business Management; Matthew Kim of TV Marketing; and JY Kwon of IT Marketing.

The conference call will be conducted for 1 hour in both Korean and English, starting with a presentation on the financial results of Q4 2019 and the company's outlook followed by Q&A.

Please refer to the IR presentation documents in the company's website for more details on the financial results of Q4 2019. For those joining through the webcast, please refer to details on the widget on your screen.

Before we begin the presentation, please take a moment to read disclaimer. Please 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.

With that said, we will now start with the presentation on Q4 2019 earnings results.

Let me start off with our business performance in Q4. On the back of increased shipments of OLED TV panels and P-OLED smartphone panels, revenue in Q4 rose 10% from the previous quarter to KRW 6.4217 trillion. However, due to the steady decline in LCD panel price and downsizing of our large LCD fab, we recorded an operating loss of KRW 421.9 billion, which was similar to the amount in quarter 3.

Our operating margin was minus 7% with EBITDA margin of 9%, and net loss was minus KRW 1.8171 trillion. The significant net loss is due to the partial recognition of the lighting and P-OLED business as asset impairment. This will be covered in detail by the CFO.

Next is area shipment and ASP. Q4 area shipment was 9.15 million square meters, a 4% decrease from the previous quarter. Although it is generally a strong season, area shipment was affected by LCD fab downsizing.

The increase in OLED TV and P-OLED smartphone area shipment resulted in a greater share of OLED products and raised ASP to USD 606, which is an 18% increase quarter-on-quarter and 8% year-on-year. Our production capacity is reduced by around 19% from Q3 due to LCD fab downsizing.

I will move on to Q4 revenue breakdown by product segment. The revenue from TV segment recorded 28%, down from the historical average due to LCD fab downsizing and utilization control. The IT products segment, including laptops and tablets, accounted for 36% of our total revenue. The share of mobile and others was 36%, an 8 percentage point rise from the previous quarter. This comes on the back of strategic partners' clear volume expansion of P-OLED smartphones.

Next is the company's financial position and ratios. Our inventory as of the end of Q4 stood at KRW 2.512 trillion, which is a dramatic reduction of 25% quarter-on-quarter. This was possible through reduced production upon fab downsizing and our ongoing effort to minimize inventory.

In terms of financial ratios, reflecting asset impairments raised the liabilities-to-equity ratio and net debt-to-equity ratio. As for Q4 cash flow, quarter-end cash rose to KRW 3.4148 trillion due to an increase in operating capital from financing activities and a reduction of inventory assets.

Next is the company's guidance for the first quarter of 2020. In Q1, we expect a considerable decline in area shipment compared to usual business trends due to a combination of ongoing LCD fab downsizing and seasonality. We expect a decline in shipment of a mid-teen percentage. Also, blended ASP is expected to fall by a low to mid-single-digit percentage due to a decrease in mobile shipments.

Next is the presentation by the company's CFO, Suh Dong-Hee.

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Dong-Hee Suh, LG Display Co., Ltd. - CFO, Senior VP & Director [3]

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[Interpreted] Good morning to our shareholders, investors and analysts. I am DH Suh, CFO of LG Display.

Allow me to add some more details on the Q4 earnings that was briefly explained by our Head of IR and provide guidance for Q1 of 2020, along with the company's future direction.

As you are all well aware, we have been accelerating our effort to reshape business structure to focus on OLED in order to secure core business competitiveness and promote sustainable growth. At the same time, we have been engaging in activities to reform our LCD business structure.

Some of our efforts are reflected on Q4 results.

The area shipment decreased 4% from the last quarter as we downsized LCD TV fabs, which were relatively less competitive. However, the increase in shipment of OLED products, including OLED TVs and P-OLED smartphones, led to an 18% quarter-on-quarter increase in blended ASP. That raised our revenue by 10% from Q3.

Having said that, our profitability improvement from the last quarter was limited. As the LCD TV fab is in the process of downsizing, it continues to record losses. As for the P-OLED business, even though we were able to dramatically increase volume quarter-on-quarter by securing stable production for our strategic partners, it was not enough to offset our fixed cost burdens.

One-off factors exerted little influence in Q4 as the one-off costs incurred in the course of reshaping our business were offset by savings from our realignment efforts.

And for net loss, based on asset impairment valuation, KRW 1.6 trillion is reflected as nonoperating expense, which temporarily increases amount of loss for this quarter.

In accordance to standard accounting principles, we review the needs of impairments on our assets every year. And in the event that results of valuations by outside experts should suggest that our expected future value falls short of our book value, we take necessary steps to recognize those impairments.

Consequently, we have reflected impairments of KRW 200 billion, resulting from our withdrawal from the OLED lighting business and KRW 1.4 trillion from our P-OLED business.

Specifically, business outlook for the P-OLED smartphone was positive up until 2018 when investments were being made. However, since 2019 when we went into mass production, we have been experiencing a stagnant high-end market and prolonged replacement cycles, among other factors. We have accounted for these changes against the initially anticipated business environment.

The recognition of asset impairments increases the amount of net loss in the short term. But as you know, this is an asset reduction only on the books. Therefore, it does not directly affect cash flow or operating income and, to some extent, has a positive impact on our financial soundness.

Debt ratio peaked at 185% at the end of 2019 by recognizing asset impairments, but it will be improving gradually onward. As a result, depreciation and amortization is expected to decrease by KRW 300 billion each year going forward.

While accounting measures lowered our book value of assets, we will adhere to our strategic direction from the perspective of the P-OLED business. The P-OLED business may be somewhat challenging by unfavorable supply and demand, but it also presents many business opportunities such as in the auto displays and foldable products in the IT segment.

From the first half of this year, we will actively increase the production of P-OLED panels for auto display and continue with ongoing efforts to secure a foundation for growth by identifying new applications in areas of IT and foldables. Also, with a stable quality and yield base for our smartphones as well, we will take a proactive approach to expanding our volume through our strategic partners.

Now let me briefly update you on the progress in reshaping our LCD business.

We are in the process of downsizing fab in response to the changing LCD market. As of Q4 2019, the local Gen 8 LCD TV fab has been suspended. And by the end of this year, all other local LCD TV fabs will also be suspended. Local fabs will now focus on IT, auto display and commercial displays, which hold competitiveness.

Finally, I would like to provide guidance for Q1 of 2020 and our business direction for the year.

As for Q1, we will continue downsizing our local LCD fabs. And with the seasonality, the area shipment is expected to decline below the regular business trend. Furthermore, the P-OLED smartphone is expected to face volatility, reflecting seasonality.

However, from the second half of the year, revenue from our large OLED will rise deeply, in line with increased production from China's OLED fab. We also anticipate meaningful improvements in performance of our P-OLED business through stable management of smartphone production, along with mass production for auto displays.

We will try to complete the LCD business reshaping process at the earliest and to improve our financials in 2020 by attaining tangible improvements in the performance of our large OLED and P-OLED businesses.

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

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[Interpreted] That brings us to the end of earnings presentation for Q4 2019. 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) The first question will be provided to Dongwon Kim from KB Securities.

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

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[Interpreted] I have 2 questions for you. The first has to do with the Guangzhou fab. Can you provide us with a timing for when the production will begin at the Guangzhou fab and the target of your OLED TV production this year?

And my second question has to do with the spread of the coronavirus lately. That seems to be having an effect on LCD fab production. So can you elaborate on how that may affect LG Display's production and the overall effect on supply and demand?

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Dong-Hee Suh, LG Display Co., Ltd. - CFO, Senior VP & Director [3]

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[Interpreted] In response to your first question regarding the OLED China fab production, you asked when we will begin the production there. We have communicated this issue on many occasions in the past. And we remain -- we adhere to our past message that we plan to start the production within the first quarter of this year. There had been previous -- some issues regarding the yield. However, all of those issues have been cleared, and we are continuing to make sure that everything is prepared thoroughly. So our target of production is set at around 6 million this year.

And regarding the coronavirus situation, we do realize that it is aggravating recently. Our company's position is that we are trying to exert our greatest efforts to ensure the safety of our employees. And according to that, we will set our directions in terms of how we will be managing our fab operations.

As for the question on the LCD supply and demand situation, I believe that is dependent upon how quickly this coronavirus issue is resolved.

Currently, the Chinese provincial governments are continuously providing guidance on how to address the situation. And I believe that not only LG Display, but our competitors in the market will also be moving in accordance to that guidance. But it is important that we secure the stability of the SCM. And I believe that not only us, but all of the players in the market are in the same situation.

So to wrap up that question, as we said, we will be focusing on ensuring the safety of our employees, and we will also keep a close eye on what the competition is doing, the overall trend within the competitive landscape and also the SCM situation. So I can say that we will try to take a wise approach to this situation.

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Operator [4]

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

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Won Suk Chung, HI Investment & Securities Co., Ltd., Research Division - Analyst [5]

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[Interpreted] The deficit was not as large as we had originally been concerned. However, there was an asset impairment loss. And the CFO explained that, that comes in part because of the asset impairments reflected with respect to the P-OLED. That should have an impact on depreciation but, at the same time, have perhaps a positive impact on future performance going forward. So does that mean that we can maybe expect a surplus in a faster period of time? And is there any change in the direction of business in 2020 because of these situations?

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Dong-Hee Suh, LG Display Co., Ltd. - CFO, Senior VP & Director [6]

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[Interpreted] Let me reply to your first question on the asset impairment. As I briefly explained, the impairments involved the KRW 200 billion from OLED lighting business and also KRW 1.4 trillion from the P-OLED business. P-OLED here refers to the E6 line at the Paju fab.

As for change in depreciation, as a result of these reflection of impairments, we expect around a KRW 300 billion reduction over the next 4 to 5 years. And on a quarterly basis, I think we can do the math if we divide it by 4.

And as for the outlook -- P&L outlook for the future, I believe that our -- the outlook for P-OLED and the company-wide outlook is pretty much in line.

In terms of the volume, in -- as I said before, the first half of the year, we are affected by seasonal issues. So there is a decline in volume demand from our strategic partners, and so that may pose a slight challenge for us.

As for our annual volume, despite the slow volume production in 1H, the first half of the year, it should pick up in the second half of the year as our PO, especially around the smartphones, we provide a stable volumes to our strategic partners. And at the same time, in the second half of the year, we should be seeing a stabilization and expansion of production at our Paju OLED fab. And so I believe that we will be able to anticipate a steep increase in OLED production, which should have a positive overall impact.

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Operator [7]

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(foreign language) The next question will be provided by Kwon Sang Ryul from DB Financial Investments.

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Sang Ryul Kwon, DB Financial Investment Co., Ltd., Research Division - Team Leader [8]

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[Interpreted] I have 2 questions. The first has to do with the one-off expenses that were executed. I'm wondering that despite the fact that these one-off expenses were made, the loss was not as high as we had expected. And I'm thinking that maybe this is because that the efficiency efforts have not been fully implemented yet. For example, the restructuring of the employee, the staff. So in terms of -- with respect to this, could you elaborate on the exact amount of the one-off expenses that went into restructuring or reshaping the head office, the staff?

Second question. The CFO explained that in the second half of the year, we can expect an improvement in the performance. So does this mean that we can possibly see a visible timing when we start to record a surplus in the business?

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Dong-Hee Suh, LG Display Co., Ltd. - CFO, Senior VP & Director [9]

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[Interpreted] Let me answer the first question first. Regarding the one-off expenses and your concern that maybe the efforts to raise the efficiency of the company was not fully implemented, the fourth -- in the fourth quarter, there were some expenses -- one-off expenses due to the restructuring of the organization. However, I cannot elaborate on the exact amount right now. And as I said, there were asset impairments. However, this was based not on end of 2019 but at the end of September 2019. And so the expected depreciation from quarter 4 was reflected in that as well. And there were allowances that we had made that was used to offset the operating loss.

The second question about whether or not I can point to a specific quarter or month when we can expect a turnaround, I have been explaining from a large picture. So as I said, in the first half of the year, we are expecting a slight decline in the shipment, which is also a result of seasonality. But in the second half of the year, with the increase in OLED TV and P-OLED, especially around the smartphones that are being -- that will be supplied to our stable -- stably supplied to our strategic partners, we will see a significant improvement. But of course, I cannot give you a specific time when we -- when I say that, "Okay, we will definitely have a turnaround."

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Operator [10]

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(foreign language) The next question will be provided by Chuljoong Kim from Mirae Asset.

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Chuljoong Kim, Mirae Asset Daewoo Securities Co., Ltd., Research Division - Research Analyst [11]

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[Interpreted] My question has to do with the LCD price. In -- up to the fourth quarter of last year, the prices seemed to be declining. However, since the beginning of this month, we have seen a steady, increasing trend. So going forward, what is your outlook in terms of the LCD TV price as well as the outlook for supply and demand of this segment?

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Matthew Kim, LG Display Co., Ltd. - VP of TV Marketing [12]

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[Interpreted] Allow me to answer that question for you. I am Matthew Kim from TV Marketing. There is a lot of concern about the coronavirus. So I will first answer excluding that impact, and then I will provide my outlook when we take the coronavirus situation into account.

Since the last quarter of last year up till now, because panel makers have been making adjustments with their P&L in mind, there has been a downsizing of fabs, and also, companies have been adjusting their utilization. As a result, supply has been somewhat taking a downward turn. Meanwhile, since Q4, demand has been more positive. And so I think that we can say that overall, supply and demand is being quite tightly managed as of now.

So I believe that this trend will somewhat persist in the first half of the year. However, I don't -- I believe, at the same time, that the suppliers will be refraining from additional mass production of their units. Having said that, I believe that there will be a special demand because of the major sports events that are coming up such as the Euro 2020 and the Olympic games. So there will be preparations made in order to respond to that special demand.

So at least up to the first half of the year, I believe that we can anticipate a stabilization of the prices as well as an increase -- a slight increase.

Now looking into the second half of the year, as you are aware, there are new fabs that are planning to start their production. And so there will be a possible change in the supply and demand. But if we consider the overall market situation of the TV segment, I think that it will be rather a burden to try to tightly control the supply and demand.

Now we have to address the issue of the coronavirus. So this has arisen as a new variable to the market right now. It will -- it should have an impact, both on the supply and the demand. However, given the uncertainties surrounding this issue, I believe that the uncertainties are greater on the supply side.

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Operator [13]

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(foreign language) The last question will be provided by [Han-Jo Kim] from Hana Financial Group.

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Unidentified Analyst, [14]

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[Interpreted] My 2 questions have to do with the LCD and OLED TV segment. Your Guangzhou fab for 200,000 units of 8G OLED -- LCD, I'm sorry, LCD, compared to the local Korean fabs that were manufacturing this product, how is Guangzhou differentiated? Is it more profitable? Can you elaborate on the situation there? And how do you plan to run the operation at the Guangzhou fab?

My second question has to do with the OLED. On top of the 60,000 that you are producing right now, you said you plan to increase production by around 30,000. Will this require additional investment? Do you have plans of -- do you have any further plans on this going into 2021?

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Dong-Hee Suh, LG Display Co., Ltd. - CFO, Senior VP & Director [15]

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[Interpreted] In response to your first question on the Guangzhou LCD fab, relative to our Paju fab, fundamentally, we have secured competitiveness at the Guangzhou fab in terms of labor costs and overall infrastructure operating costs.

However, our operations of the Guangzhou fab is not an issue of just utilizing our competitive edge or gaining a competitive edge in terms of costs. We clearly have differential competitiveness, and we want to reflect that in our production at Guangzhou in order to be able to secure greater profitability going forward.

Next, for the OLED, we have the capacity for the 60,000 right now. And for the remaining 30,000, we will be making -- we will be taking the necessary steps and making the required investments in the facilities.

(technical difficulty)

Sorry, we were experiencing some sort of technical difficulties. We will go on to reply to your question on the 10G Paju fab.

In terms of the investment going forward in the 10G fab, we are conducting a very thorough review of the market in order to be able to decide the right timing for setting up the equipment and going into production. As of now, we expect possible investment [faster] 2023 and beyond. Until then, we will be closely examining the market in terms of new devices and other changes in order to come to a conclusion on the best timing. Thank you.

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Operator [16]

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[Close] Q4 2019 Earnings Conference Call. I apologize once again for the technical difficulties during the conference. Thank you for your patience, and thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.