LG Display Co Ltd (LPL) 2008 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you so much for standing by and welcome to LG Display's earnings release conference call for the third quarter of fiscal year 2008. This conference call will start with a presentation, followed by a divisional Q&A session. (Operator Instructions). Then, without further ado, I would like to turn the mike over to LG Display for their third quarter earnings release of FY08. Would you like to go ahead, sir?

Yes. Welcome to LG Display's third quarter 2008 conference call. My name is Thomas Hyun and I am the Vice President of Investor Relations. On behalf of LG Display, I would like to welcome everyone to our global quarterly earnings conference call.

I'm joined by Kevin Choi, Vice President of TV Marketing Department, Davis Lee, Vice President of IT Marketing Department, C.S. Chung, Vice President of Mobile Marketing Department, [Y.H. Jeong], the Senior Manager of Corporate -- of Market Intelligence Department, and C.H. Lee, Senior Manager of IR Team.

We have approximately one hour for this call and we will spend the first part of the call discussing the key issues for the quarter, which will correspond to the slides available on our website. Afterwards, we'll take your questions.

Before we move into our discussion of the earnings results, please take a minute to read the disclaimer.

We are reporting in consolidated Korean GAAP, with an appendix to this presentation that includes our reconciled Korean GAAP and US GAAP numbers. Over the next hour, I will review our earnings results from the third quarter of 2008, discuss our performance and conclude with the outlook for the fourth quarter of 2008. Afterwards, we would be glad to take your questions.

Please turn to the next slide. Before we get into the details of our last quarter's financial performance, I would like to offer some observations of both our business and the industry.

During the third quarter, LCD panel makers faced a challenging industry environment which greatly affected our performance. The sluggish global economy conditions resulted in slow demand of LCD panels. And we expect the total demand for the year is likely to be reduced, compared to our original expectation.

In the TV segment, there was continued downward panel size shift from large to small and medium in the US. In the IT segment, there was continued inventory adjustment by IT set makers. Regarding inventory situations of the TV and IT set makers at the end of the third quarter, we believe their inventory levels have become close to normal.

In order to proactively overcome the challenging market environment, we decided to cut production from the last week of July and the average production cut in Q3 was approximately 10%. These efforts resulted in our inventory to reach a normal level in the last quarter. We'll continually be flexible about production cuts going forward.

Our investment in Gen 8 and Gen 6 expansion plans will be carried out as planned. However, the ramp-up schedule and speed can be flexibly adjusted depending on the market conditions.

Due to the challenging market environment, our EBITDA margin recorded 23%. However, we managed to achieve cost reduction of a 7% decrease quarter on quarter through our ongoing cost reduction efforts. Our cost reduction initiatives include effectively reducing procurement cost through win/win collaboration with our suppliers, as well as developing and launching new cost innovative models.

During the third quarter, some of our operations were positively affected by Korean won depreciation against the US dollar. We made an important strategic move in the third quarter through forming a joint venture with Amtran, which will produce LCD modules and TVs as part of our business transformation efforts. This collaboration will help us to expand our customer base by securing a stable, long-term source of demand for our panels and to lower cost by producing LCD modules and LCD TVs in the same plant.

Although we will be facing challenges going forward, we are confident that we have the right strategies in place to quickly and efficiently respond to the constantly changing market dynamics and to create additional value for our customers, shareholders and other stakeholders of the Company.

Now, to the financial details. Next slide, please. Revenues in the third quarter was KRW3.9 trillion, down 8% from the second quarter of 2008 and down 2% compared to the same period last year. And it was a result of a slower than expected demand growth, affected by the sluggish economic environment.

COGS per square meter in US dollars decreased by 7% quarter on quarter, in line with our guidance. Operating income in the third quarter was KRW254b. EBITDA margin recorded 23%.

Next slide, please. As of September 30, 2008, we reported approximately KRW3.8 trillion cash. During the third quarter, our finished goods inventory turnover level for large panels was reduced to around two weeks, from slightly under three weeks in the second quarter. TV inventory level was decreased to three weeks, from slightly over four weeks in the second quarter, while IT inventory level was decreased to under two weeks from about two weeks in the second quarter.

Our liabilities to equity ratio was 80%, while our current ratio was 186%. On the bottom left, our debt was approximately KRW4.2 trillion, which was a KRW97b decrease from the end of the second quarter. So, our net debt to equity ratio was 4%, slightly down from the end of the second quarter.

Next slide, please. Cash at the beginning of the third quarter was approximately KRW3.8 trillion. Cash from -- cash flow from operation was KRW1.1 trillion. Cash flow from investing activities during the third quarter was negative KRW920b. So, cash at the end of the quarter was approximately KRW3.8 trillion, which was almost the same level as the beginning of the quarter.

Next slide. Now, I would like to explain in more detail about several specific performance metrics.

Next slide. During the third quarter, shipment of total display area increased by 12% and reached 3.7m square meters, which is slightly lower than our expectation. Shipment didn't increase as much as we originally had anticipated in the third quarter due to the sluggish global economic environment, which resulted in slow demand growth of LCD panels. In the IT segment, set makers continued their inventory adjustment in the last quarter.

Also, ASP decline was steeper than our original expectation. On average, ASP per square meter of net display area decreased by 22% to US$992. For the TV segment average ASP per square meter in the third quarter fell 16%, and for IT it fell 27%.

Next slide, please. Due to the larger than expected ASP decline of IT panels, the revenue mix changed quite a bit. During the third quarter, the TV segment represented 51% of revenues, which was followed by both monitors and notebooks representing 22% each. Other applications accounted for 5% of our revenues.

Next slide, please. During the third quarter, the total production capacity of LG Display increased by 8%. However, as previously announced, we did not fully utilize our capacity in the third quarter through production cuts by about 10%.

Next slide, please. Now, we turn to our outlook discussion.

Next slide. I would like to present you our outlook for the fourth quarter of 2008. We expect our total shipments to increase by a low to mid teens percentage. Average ASP per square meter is expected to decrease by a high single digit percentage.

In the TV segment, we anticipate shipments to increase by a high teens percentage, with an average ASP decrease of a high single digit percentage. In case of the IT segment, we expect shipments to increase by a low teens percentage, with an average ASP decrease of a high single digit percentage.

We'll continue to drive our cost reduction strategies and expect our COGS reduction per square meter to be a high single digit percentage in the fourth quarter. We expect our EBITDA margin for the fourth quarter will be low 20s percentage.

Regarding CapEx, we have communicated in the last quarter that this year's CapEx will be around KRW4.5 trillion, but it is expected to be reduced to around KRW4.1 trillion. That's because around KRW400b worth of equipment is expected to be delivered to our fab early next year instead of by the end of this year.

Thank you. And this ends our presentation for the third quarter of 2008 and we are glad to answer your questions now.

(Operator Instructions). The first question will be presented by Mr. Andy Abrams from Avian Securities. Would you like to go ahead with your question, sir?

Yes, thank you. I wonder if you could characterize your customer base during the quarter, during the third quarter. Have you expanded that base? Has the character of that base changed, so you're now working with a broader group of customers? Or maybe you could just give us some color on how that worked for you during the third quarter.

For TV area, this is Kevin Choi. I'll explain about TV first. For TV area, our customer base is we are not selling our panel to Sony and Samsung and Sharp. But except that customer, the rest of the -- or most of the TV companies are our customer. And out of those customers, we -- our side -- LG Electronics, and there our market share is -- has been growing steadily since last year. So our volume shipped to LG Electronics automatically grew together. So that was some plus to our side.

And also [video case] in the US market, second quarter they were -- the business was only -- was slower than the first quarter. But third quarter their business has been improved, so our shipments have been increased also.

And other Japanese customer, all of the Japanese customers' business is also improved compared to second quarter also. And some European customers' business also, our position has been growing compared to second quarter. So, most of the customer is improving.

Also, in China market local companies, Chinese local companies, they're the biggest companies in China. And second quarter, their business was impacted by Chinese situation, like earthquake. And although the economic situation was poor, so global brands in China market they gained market share. But third quarter, after Olympic Games, these Chinese local companies' market share has been increased about 10%. And as you know that we are shipping a big portion to these companies, so automatically our volume shipment has been increased also. That was the (inaudible) the information.

Okay. This is Davis Lee. To follow by TV side, I will continue with IT side. Regarding IT side, actually, there is -- there has been no significant change about the customer base. But we successfully increased our same portion compared to the competitors.

The reason behind that is we have a product strategy well aligned with our major customers. And also, the cost advantage competitiveness that we have over our competitors and the quality of the products and the very intimate customer relationship that we have been maintaining up to this moment, that all contributed to expand our same portion compared to our competitors. Also, there is some increase in the customer base. But the major portion I would like to say it is mainly coming out of our increased same portion.

Great. Thank you. And just one other point. If you could talk about the smaller size you mentioned in the US, I guess particularly in the US, what's been your view on average panel size from your perspective in the TV space? Can you give us some idea of how much it's changed from maybe the beginning of the year and then maybe from last quarter?

US market situation, when you look at the market, US market first quarter, second quarter and third quarter trend was only a bit different than other regions because the US market, normally first quarter that includes the Super Bowl. So normally in the first quarter US market big-screen TV sales is pretty good compared to other regions.

So that's why normally first quarter and second quarter, if you compare, normally second quarter size-wise a little bit decrease may happen because first quarter, Super Bowl season, people buy big-screen TV. So Europe and other countries, normally first quarter/second quarter, second quarter should go a little bit bigger. But US market specifically, first quarter/second quarter, second quarter may be slightly smaller than first quarter. That's normal.

But on top of that, because of economic situation, people buy a little bit low price model and also a little bit smaller size TV, so that impacts us slightly. The total average size declined a little bit. But it's not a huge impact. Even though the trend is downward trend, but it's not a huge, big change.

So we still think that, fourth quarter come, big-screen size TV promotion is -- will be very pushed by the set TV makers. So I think that the fourth quarter 42-inch and 46, 47, those kind of size promotion will hit the market. So that downward trend, even though it's happening, but still it's not a big change. It's a slight change. That's what I'm forecasting.

Great. Thank you very much.

Okay.

The following question will be presented by Mr. [Dan Kim] from Merrill Lynch. Would you like to go ahead with your question, sir?

A quick question with regard to your inventory level for the third quarter and what you expect in the fourth quarter. It seems like a slight inflation or a spike up in the Korean won to the dollar rate made the inventory look worse in the third quarter, yet the Korean won to the dollar didn't move that much in the third quarter versus what we're seeing right now. What do you see the impact of your US-dollar-denominated inventory in the fourth quarter if the won ends at KRW1200 to the dollar?

This is Thomas. You're right. Because of US dollar, situation is the US dollar appreciation is quite appreciated. So the value in terms of amount you see in inventory looks high. So that is the impact of FX impact. In terms of when you look at DIO (sic), days of inventory, it's pretty normal. So, through all the production cuts we went through, the inventory has been down to a normal level.

Next question is going to be presented by Mr. Jae H. Lee from Daiwa Securities. Would you like to go ahead with your question, sir?

Yes. Hi. I guess you have revised down the CapEx numbers, which is based on the delivery base. So I'd like to know what would be the amount in terms of cash out base for 2008. And also, if you have guidance for that for 2009, that would be appreciated.

So this is C.H. regarding cash out basis. We don't have data in front of us at the moment.

And also, regarding the CapEx next year, we -- directionally, we think it will be around KRW1.5 trillion to KRW2 trillion, which is upward adjusted from KRW1 trillion to KRW1.5 trillion, reflecting the technical adjustments because the equipment which are scheduled to deliver at the end of this year will be carried over next year, around KRW400b. So if we reflect that, then our guidance -- original guidance, KRW1 trillion to KRW1.5 trillion, it is just naturally moved to KRW1.5 trillion to KRW1 trillion (sic).

Right. How about for the depreciation amount from 2Q to third quarter? The amount has decreased over 10% and I was wondering what you expect for the fourth quarter.

The fourth quarter, one thing is that our depreciation for P6 has been fully depreciated. So the amount is about KRW40b impact. So our Q4 is about KRW40b less than Q3.

Okay. So, around KRW580b or so. Okay. Great. Thank you very much.

The following question is going to be presented by Mr. Jonathan Rhee from Citigroup. Would you like to go ahead with your question, sir?

Okay. Thanks for taking my question. I noticed your tax in the third quarter decreased quite substantially. Can you tell us where this is coming from?

And also, on the non-operating side, do you have the details of the biggest contributor to the gains? I'm assuming it's coming from FX-related. Thank you.

Okay, Jonathan. We mentioned about the tax pay alert.

Right, the tax --

Okay. Okay, let me explain. As you know, we started to phase in our Gen 8 facilities from Q3, so -- which incurred some tax credit for the -- in that month, which affected favorably to our tax payable in Q3. So we expect that trend will continue in several months. So, regarding some gain in our operating -- our profit, will be the cash. So, as you know, we have around KRW4 trillion in cash at the beginning of the quarter, so, which will incur some cash interest profit. That is main contributors in our non-operating profit.

Thank you.

There is nobody on queue with questions at this moment. (Operator Instructions). The following question is going to be presented by Ms. Olga [Vasumzong] from Barclays. Would you like to go ahead with your questions, ma'am?

Thank you. Hi. Thank you for taking my question. I guess, when you talk about your guidance for 4Q in terms of reducing your COGS by high single digits, can you talk about which factors are driving that and which components you see the biggest cost reduction?

This is C.H. We're -- actually, from last year, we are very focused on the win/win cooperations with our component suppliers, so we make efforts to make some profit from them. But from this year, we have some benefit from that. So, we cooperate each other with our component suppliers. So, in Q4 we will see most part of our cost reduction from the component side.

And then, the KRW400b CapEx push-out for 2009, is that related to the Gen 6 fab, the Gen 8 fab or a combination of the two?

So, actually, it is combination both Gen 8 and Gen 6.

Okay. So where do you see -- I guess by mid-2009, what is the capacity of each fab that you expect?

So, actually, it is just a technical timing adjustment, so it will not affect any CapEx. That CapEx is as scheduled.

Okay. So, no adjustments to your capacity around schedule?

Right.

Okay. And one final question. Can you, I guess, provide us with some guidance on your level -- what your utilization levels were in 3Q and where you expect them to be in 4Q?

Q3, we started our production cuts from the last week of July and we continued that throughout the rest of the Q3. An average was about 10%. In October, we are doing -- our production cut is about 5% level. For the rest of the quarter, November and December, we haven't decided yet how much percentage we are going to do. We will just look at the market very carefully and we'll just react and respond to those market situations. So, we will just flexibly adjust our production cuts, if necessary.

Okay, great. Thank you.

Next question is going to be presented by Mr. Frank Lee from Loch Capital. Would you like to go ahead with your question, sir?

Yes, thank you. I wanted to ask you, I guess, two questions. Number one, given your fourth quarter guidance of unit growth, you're still looking for sequential growth, are you expecting to gain more market share relative to your competitors in the fourth quarter or do you expect that overall market demand is recovering? Are you seeing some seasonal strength in terms of the better unit growth guidance for Q4?

Okay. This is Kevin Choi. For TV side, we think that our growth ratio in fourth quarter is higher than market growth ratio. That means that we expect our market share will increase in that portion. So, yes, you can say that we expect our market share will grow in fourth quarter.

Davis Lee. From IT side, yes, even though the monitor market is quite flat or a small increase, we expect the quarter to -- quarter over quarter, about 10% increase expected because the last quarter, industry has reduced inventory levels so significantly. And also, if you think about the seasonality, even though annual growth is very small but, quarter over quarter, we still expect about 10% growth.

And the notebook side, even though there the market outlook for the macroeconomic situation is not so good, but still we are foreseeing about 20% plus market growth. In that kind of growth, you can see that it is a little bit higher than our competitors' growth. So, you can interpret it as the overall competitiveness contributed that kind of guidance. But we clearly can tell you that we are not just waiting on market share gain or whatsoever.

Okay. As a follow-up question, I think there was a point brought up about depreciation for your Gen 6 line. Gen 6 fab is fully depreciated and you would save about KRW40b in costs, is that right, in Q4? How much of that have you -- is part of your expectations, in terms of the cost savings that you're guiding for the fourth quarter? Is it dependent on the depreciation, the savings you're seeing?

Yes. Depreciation reduction out of Gen 6 slightly contributed to our cost reduction. But as earlier question, there are many different areas of all the initiatives that contributed to cost reduction efforts, not just simply -- not just depreciation. So, for instance, there is still max cap/min [load] initiatives going on. We are getting a lot of process improvement and there are lot of production efficiencies we are getting. There is a huge improvement. All those add to the raw material cost reduction that we are getting out of all the win/win collaboration with our suppliers. So it is a rather holistic approach to cost reduction efforts, where depreciation, again, is a small part of it.

Okay. And I guess my final question is, given the cost savings you're seeing, and especially from the depreciation side, do you see this as a -- related to your market share growth, do you see, perhaps, a more aggressive pricing strategy from LG going into Q4, in terms of to see the strong unit growth that you're seeing for Q4?

This is Kevin again. It's not just a pricing strategy. We've been working with a customer since earlier this year. Because TV market, it takes long time to align the product because at least it take minimum more than six months to align the product line with customer. So, since January and February we start aligning our product with our customer, and that's aligned very well in all the third quarter. So, automatically, our product -- our volume is growing right now, based on that kind of product alignment.

As I explained, we have very good technology in the IPS area. So 120Hz or that kind of product line, we have very strong picture quality and product quality and all those level it's very good. So, in that kind of area, our market share is very high. So, automatically, that help our volume growth.

So, it's not just a price competition. It's a kind of product-related strategy, together with the right price range. So, we expect that our fourth quarter TV shipment volume will be higher, based on that kind of situation.

And also, one of the better thing, as I explained to you, is the China market has been improved and that also helps our volume growth. And then, our major customers' market share is stabilizing the market, so we are also slightly increasing our share in that strategic customer also. That's both kinds -- both two factors help our market share growth.

Let me add some point in IT side. At this moment, IT side there are a lot of changes in the product side, for example, like 16x9 transition and a lot of new products. So, it's a really difficult time for our customer too. They have a lot of increased SKUs, too many. So, our customers, they are also trying to reduce the supplier base, taking advantage of oversupply situation. That also contribute some of the consolidation effort in the supplier bases.

And even without that kind of trend, we have clearly set out our strategy and we are simply not waging our market share winning game alone. So, based on our competitiveness we've demonstrated, and also customer side there are needs for consolidating their supplier base, this all contributes to our gaining market share. That's the way I understand.

Okay. Thank you.

Thank you.

The following question is going to be presented by Mr. Manish Nigam from Sansar Capital, Asia. Sorry if I pronounced your name incorrectly, but would you like to go ahead with your question, sir? Mr. Manish Nigam? Hello? Are you there? The following question, then, is going to be presented by Mr. Chung Tan from Nevsky Capital. Would you like to go ahead with your question, sir?

Hello. Good evening. Just a first quick question, just regarding your depreciation. You were saying that the Q4 depreciation's going to drop off. Could you give us some guidance on your 2009 depreciation? And when do you expect depreciation to jump up again, once 8G starts ramping up?

Okay. This is Thomas. And our 2009 depreciation will be approximately same as this year, 2008, which is about KRW2.7 trillion, KRW2.8 trillion, or in between KRW2.5 trillion and KRW3 trillion.

Okay. And the second question is regarding your max cap initiative. As I understand that, basically that initiative has been, basically, to stretch your existing capacity to maximize production from them. And I'm just wondering how much more you can get out of that. Will that be fully realized by the end of this year, or will that initiative carry on into 2009?

We are, obviously, in the first phase of max cap. There are a lot of initiatives we started. But the second phase and third phase, it goes on. We are working on different areas. More engineering side of max cap initiatives is going on. So, we are also studying new fabs and there will be new models, new sizes coming in. There will be more opportunities with different angles of how we maximize our max cap initiatives. So, as far as we know, the max cap initiatives will go on for a while.

Okay. And just a final question is just regarding your capacity ramp up. Given your guidance of KRW1.5 trillion to KRW2 trillion CapEx next year, what does that -- does that imply that you can fully ramp up your 8G and your 6G fabs by the end of next year?

Our original schedule, our ramp up -- the schedule will be fully ramped up by the end of next year, you're right. And our CapEx -- it doesn't affect our CapEx. Our CapEx will be exercised as is, as originally planned. However, as I mentioned earlier, our ramp up schedule and speed will be flexibly adjusted, depending on the market situation.

Okay. Thank you very much.

There's nobody in queue with questions at this moment. (Operator Instructions). The following question is going to be presented by Mr. Matt Evans from CLSA. Would you like to go ahead with your question, sir?

Thanks. You mentioned that the depreciation for one of the fabs has been completed, but I wasn't clear on whether that was this quarter or next quarter. So did that result in KRW40b dropping out in the third quarter, or is that to come in 4Q?

It was fully depreciated at the last quarter.

3Q. Okay. Thank you.

There is nobody in queue with questions at this moment. (Operator Instructions).

Okay. Given that there is no questions, I would like to try to end the conference call. On behalf of LG Display, we thank you for your participation in our third quarter earnings conference call. If you have any further questions, please contact either myself or my colleagues. Thank you.