LG Display Co Ltd (LPL) 2012 Q1 法說會逐字稿

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we begin the conference of the fiscal year 2012 first 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 2012 first quarter earnings results by LG Display.

Welcome to LG Display's first quarter year 2012 conference call. My name is Hee Yeon Kim, Head of IR department. On behalf of LG Display, I would like to welcome everyone to our global quarterly earnings conference call.

I am joined by our IR staff, as well as representatives from TV Marketing and IT Marketing. J.S. Park is heading up the TV Marketing department; Kevin Choi is Vice President of IT Marketing department.

Next slide, please. Before we move onto the earnings results, please take a minute to read the disclaimer. I would like to remind everyone that results are based on the consolidated IFRS accounting standards and are unaudited.

Next slide, please. This conference call will take an hour.

Before we go into the Q&A session, please allow me to highlight our first quarter year 2012 results performance highlights and outlook.

Originally, our panel shipments for first quarter was expected to be similar to the fourth quarter with channel inventory [stocking] demand and new module lineup by [said metrics], as well as launch of our differentiated products. However, some delay in the schedule of differentiated products and new module development resulted in poor [shipment decrease].

Operating loss continued, while panel price remained stable after slight decline, all in the quarter.

Cost reduction recorded low single-digit.

Various improvement efforts to increase competitiveness in first quarter affected the results negatively due to some delay of new module shipments. As most of the issues have been already resolved, we expect these efforts to bear fruit in second quarter; leading to a meaningful improvement in the results.

Looking at second quarter, the demand is expected to be stronger. While the inventory level industry wise remains low, orders from our customers is expected to be strong, with new module lineups in preparation for the sport events.

As a portion of differentiated products, including FPR 3D, panels for smart devices continues to expand. In an improving market situation, we expect to [try and top it] in second quarter. However, as the global economy still remains uncertain, there are some uncertainties in the market which could potentially impact the panel shipments.

Looking at the overall display industry, we feel it is indisputable that LGD has entered maturity and slow growth stage. LG Display is carefully carrying out thorough analysis into strategic direction and investment plans, with the following three points under consideration; number one, the optimization of the existing LGD business; number two, taking leadership in the rising OLED TV market; and number three, finding future growth engines.

China investment, which is to be carried out near future, will also be a part of LGD business optimization by expanding access to the China market and obtaining cost competitiveness.

We will tell you more about these long-term strategic directions and investment plans in the next quarter earnings.

Now moving onto our financial results. On page 7 -- page 3, revenue in the first quarter was KRW6.6 trillion (sic - see slide 3); down 6% quarter on quarter. The demand was strong compared to traditional seasonality; however, delay in the differentiated product and new module development schedule resulted in manufacturing capacity decline. This resulted in 4% shipment decline compared to the previous quarter.

After panel price dropped slightly in the early months, it remained stable throughout the quarter.

Operating loss increased to KRW178 billion, and operating margin to minus 3%; while EBITDA margin remained stable at 13%.

Net income was minus KRW129 billion.

Moving onto slide 4, looking at our financial positions and ratios. Cash and cash equivalents rose by KRW60 billion to KRW2.4 trillion.

Inventory was maintained at a healthy level at KRW2.2 trillion.

Debt level rose slightly, recording a net debt-to-equity ratio of 29%.

Moving onto slide 5, looking at our cash flow. Cash at the beginning of the quarter was KRW2.3 trillion.

Cash flow from operating activities resulted in cash inflow of KRW656 billion; cash flow from investing activities resulted in an outflow of KRW1.3 trillion; and cash flow from financing activities resulted in an inflow of KRW677 billion. As a result, the net change in cash was inflow of KRW60 billion.

Moving onto our shipments and ASP on slide 6. Looking at our shipments, it decreased by 4% quarter on quarter, recording 8.1 million square meters. This is due the temporal capacity allocation for the development of differentiated products and new developments.

ASP, based on LCD module price, remained flat at a slight decline all in the quarter and recorded $669 in first quarter; a 2% quarter-on-quarter decrease.

Moving onto our product mix on slide 7. In first quarter, TV product mix is 47%; monitor 21%; notebook 15%; tablet 5%; mobile 12%.

New tablet [case] shipments in the first quarter suffered a temporary delay in production, which reduced the revenue portion in first quarter. However, as the normal shipping is to begin in the second quarter, the revenue percentage is expected to rise back to the previous level.

Moving onto slide 8, and looking at our capacity. Our manufacturing capacity decreased 8% quarter on quarter to 10.2 square meters due to the shorter number of working days, in addition to temporary capacity allocated to the development of differentiated products and new modules.

Next, we come to our outlook section. We expect better demand in second quarter as customers prepare for new module lineups before the sporting events, while industry inventory remains low. We expect our total shipments to increase by around 10% quarter on quarter, and ASP to show a slight upward trend.

This quarter, LG Display is [leveraged upon] the [Asian plus trend] and the competiveness; [we then approach] emphasizing differentiated products, as well as new modules.

With the foundation that we've laid, on top of the improved market situation, we expect to show better results and begin moving towards a turnaround in the second quarter. As always, LG Display will continue to lead the industry with its differentiated and world-class products.

With that, I will end my summary of first quarter and future outlook, and would be happy to take your questions. To use the time efficiently, please limit to three questions per person.

Operator, proceed to Q&A session, please.

(Operator Instructions). Matt Evans, CLSA.

Thanks for taking my call. First question is in reference to your comment that some new products were delayed in the first quarter. And you said that the issues are mostly resolved and things will be normal in this quarter so do you mean by that, that already in April those issues are resolved and you're now able to ship those delayed products? Or is it something that you're just saying during the quarter, at some point before the end of June, you will be shipping those products?

As I mentioned, [the issue] is already resolved; the shipment was already started in April.

Okay. And so that, that -- and the shipments, can you comment as to whether they're at mature volumes, mature yield, or is it still ramping up?

Yes, definitely, we are okay in terms of yield and other things. Everything's okay.

Okay. And I wondered if you could elaborate on the first of the three strategies you mentioned in terms of optimizing the existing business. Could that mean, for example, no longer producing 32-inch commodity TV panels and using your capacity for more value-added products?

Actually, the philosophy for the optimization of LCD is, yes, we will move towards a variable product segmentation. However, it doesn't mean we will not do any more for the 32-inch. What I'm trying to say is we will more focus on the variable products, as the differentiated products. We don't have any specific size and category yet.

Okay. My third question is can you give us some sense of how you're thinking about capacity, going forward? I understand you have this trade off where if you convert an LCD fab to OLED, or if you move equipment from Korea to China then your capacity will reduce; but on the other hand, you don't want to increase your gross capacity because the industry's already oversupplied. So can you help us understand how you're thinking about that trade off, and what the various strategies could be?

Actually, it's a bit difficult to mention about the overall capacity trend because we are not finalized yet for our strategy movements, including OLED fab and China fab.

However, anyway, maybe this year/next year we will do some of the investment activity, such as [already deliver] -- (inaudible) or China or both of them. But, anyway, we will try to limit our LCD capacity. And we are not highly unlikely to increase the LCD capacity any more so if we will do any -- we will make -- we will do our decision making for the China fab, the [two] OLED capacity will remain stabilized.

So that means that if you convert one of the existing fabs, for example, then you would buy new equipment to keep the LCD capacity constant? Is that what you're saying? Or are you saying it could only go down?

Actually, if we will have any new capacity increase for the LCD, in this we might have a high potential of LCD conversion to OLED. So, all in all, the function of the LCD and OLED capacity increases should remain flat, going forward.

Okay, thank you.

Andrew Abrams, Avian Securities.

Could you just talk about CapEx, in general, for this year? Do you expect any changes in your cash out CapEx? I think you were talking about KRW4 trillion originally.

For now, we don't have any material changes; it is still KRW4 trillion. But if -- right now, we are in the process of reviewing our strategic forecast. So if there is some decision making for the OLED or other things, yes, there's some possibilities it would be changed it, but we cannot expect any material change. Maybe the issue would be around KRW4 trillion, or slightly over KRW4 trillion.

And in terms of your first quarter and expected second quarter costs down, can you give us some indication there?

Every quarter we are targeting low single, or mid single-digit cost reduction. In first quarter, our cost reduction was mid -- low single-digit; we are targeting similar level in second quarter as well.

And is that both on the material side and on the design side? Or is it toward one side or the other of those?

All sides.

Right. And lastly, on your potential plans for China, the facility that you would build there, just to make sure I understand this correctly, would essentially be replacing converted OLED capacity somewhere else? So the LCD side, even if you did do the China fab, would stay roughly the same regardless of what the OLED capacity is? I just want to make sure I understand that.

And if in fact you did make a decision on China, would that actually -- would the construction start this year? And how long do you think that process would take before you were up and running?

In conclusion, we will build a China fab, yes, as we already have a conclusion for the China fab issue. But how will -- how many mother glass improve, or the China fab will be a new fab or not, this is not decided yet. So, all in all, as I mentioned before, Korean and China, their total capacity should not be that different from now.

Okay, so it's a zero sum even with the China fab? That's just where I was going.

Actually, it can be minus capacity, or slight plus capacity. It's totally depending on the Asian market in many situation.

Good. And no timing has been set yet, is that correct?

In this year we will do a China fab. We will start the China ground breaking.

Right, sometime this year the ground breaking. Okay, thanks very much; I appreciate it.

Jeffrey Toder, RBS.

A few questions. Kind of back to the capacity question, but a narrower timeframe; there was a sharp drop in capacity, and you gave some reasons for that, in first quarter, do you expect the second quarter capacity figure to return to the fourth quarter figure? Or do you expect it to still stay below that number?

Our second quarter capacity should be similar to Q4 numbers.

It should be similar to Q4 numbers, okay.

[Q4] numbers.

Okay. Then, I know we've had this question about three times, but I just want to make sure I'm clear on this. So when you talk about long-term capacity staying roughly static, you're talking about total capacity of combined LCD and OLED, is that correct?

Yes.

Okay, good. Okay, let's see. I had a few housekeeping questions just to get out of the way. Your utilization rate in first quarter?

It's low 90%, low to mid-90%, based on our production capacity.

Okay, good. And when you gave your ASP guidance, is that on a like-for-like area basis, or is that on a blended basis?

Sorry?

Your ASP guidance, is that on a --?

ASP guidance?

Yes, is that on a like-for-like basis, or a blended basis?

That's apple-to-apple basis.

Okay. On a blended basis, since, as you mentioned, you will be ramping up some new products, what would you expect your -- how would you expect your ASP to perform?

In first quarter, or in second quarter?

Second quarter; first quarter's already done.

Second quarter. In first quarter, our product mix was very similar so blended ASP and apple-to-apple price change was very similar. But in second quarter, we already guided apple-to-apple price is likely to rebound. The blended ASP is likely to rebound at low to mid single-digit.

Okay, good. Can you -- okay, so no changes on the OLED front. Did you give at the local meeting any guidance as to when the ground breaking in China would occur?

China?

The China ground breaking, you said this year --

China, yes --

Is that like second quarter, or is that like fourth quarter?

It's not decided yet for now, but maybe it will be soon.

Okay. And is ground breaking in China, and whatever you're going to do, included in this year's CapEx forecast?

Yes, it is already included. But the amount is very negligible because most of the cash outflow will be done in next year.

Okay, good, makes sense. Now, for depreciation, so P-98 is coming online so you expect deprecation, I think, to increase in 2Q? Can you give a guidance figure for that?

Yes, we are scheduled to ramp up P-98 fab in May, so actually -- [lastly], our monthly depreciation expense for P-98 is around KRW30 billion, so you can calculate quarterly numbers.

Okay, so that's in May. Okay, right, that's very good. Let's see, just one other -- well, two other quick ones, sorry. When you mentioned in your strategic initiatives, your third one was fund future growth engines; and that, of course, is excluded from optimization of existing business and OLED leadership. What kind of other growth engines would you be referring to?

Well, that area is [OLED] to mention about that, so that's why I mentioned there were more. We will give you more ideas next conference call, just to deliver our ideas.

(multiple speakers). Okay. Are those factors all related to display? Or could you look at other types of businesses that use similar processors?

We can cover other types of business, but it will be related to our display business.

Okay. And I wonder if you could just go over your global forecast for capacity demand growth, and also for tablet, notebook, monitor, and TV shipment numbers?

Jeffrey, you already asked three questions; please call us later for the numbers.

Okay.

Thank you.

Daniel Chong, SK Securities.

I have two quick question; one on OLED, and one on LCD. My first question on OLED is will there be any other TV sizes released other than the 55-inch that you announced? Will there be -- yes.

My second question is, I know it's a little bit early to talk about profitability for OLED, but when you release the TV panels in the second half is there a possibility that you'll be selling them at a loss?

Also for LCD, can you tell us the specialty panel [version] for the first quarter, and your plans for the second quarter?

Right now, we only have 55-inch OLED television size because the overall capacity is very limited.

Okay.

And it's very early to mention about profitability related to OLED. [Decided]. It's a very [early] stage so -- and also, yield ratio should not be that high. So if we mention about the profitability for the OLED side, it should be better made next year.

Okay.

And for the differentiated products portion in Q1, it is low 40% -- lower than 40%. In Q2, it might be close to 50%.

Is there a possibility that it could go over the 50%? Or is it more close to 50%? Or is it more close to 45%?

Close to 50%.

Okay, thank you very much.

Matt Evans, CLSA.

I wanted to ask if the flexible OLED is considered -- do you categorize that under future growth strategy/new business? Or is that under the second point?

[Separately].

That's considered a potential new growth driver, not existing business, right?

Specially with the flexible, that should be the new growth engine [carrier].

Okay. And could you give us the mother glass input for P-9 in 2Q and 3Q?

P-98 mother glass input? In an early stage this should be 15,000 or 20,000; and the full scale, it should be 50,000.

Okay. And can you comment at all on any plans to produce high PPI so-called retina-type displays for notebooks in the next six months? Is there something in your schedule?

Yes, but there is limited quantity. However, the customers' request for the high PPI panels for the notebook is growing continuously, and we believe next year the more quantity is expected for the high PPI panels.

Could you give us a range roughly what the PPI would be that you're talking about, and perhaps what the current PPI is in mainstream notebooks, just to give us a sense of the increase?

Actually, there are so many various PPIs which the customers are requesting, but we believe around 200, or 200-something, PPI would be quite popular next year.

Okay, thank you very much.

Currently, there are no participants with questions. (Operator Instructions). Jeffrey Toder, RBS.

So I can ask my last question, again. Can you give your forecast for 2012 capacity and demand increase, as well as shipments by segments?

By segment?

Yes, like notebooks, monitor, and TV.

In terms of capacity, we don't have any individual capacity [size]; we only have total capacity. In terms of industry capacity growth, this year we're expecting that 5% capacity growth; and demand growth should be around 10%.

By application, we only have shipment growth; namely, demand growth. For television, we are expecting 10% shipment growth; and monitors, 2% [due to missing the business]; smartbooks is close to 50%.

Okay. And that's panels, or units?

Based on panel shipments.

Okay, good. That was my last question -- one other question, actually. For Touch InCell, can you tell me where you are on that, and when you plan to be in commercial production?

In terms of InCell, we are already ready for the R&D and production base. We are waiting for the final confirmation from our customers.

Okay. And I assume this is for small size, for handset size. When do you think you might be ready for, say, a smartbook-type product?

Actually, for that question, please understand, obviously, we cannot mention about that issue.

Okay. Right, thank you very much.

Andrew Abrams, Avian Securities.

I'm sorry, I just missed what you said about capacity and the individual groups. If I heard it correctly, you said total capacity increase for 2012 for you would be 5%, or is that for the industry overall?

Industry 5%; and also, our best growth is around 5%.

And on the demand side, you said 10% for the industry, and similar for yourself, I assume?

In case of industry, it is around 10%; but in case of LG Display, it's around 20%.

Okay. And in terms of the individual, I thought I heard you say monitors plus 2%, smartbooks 50%, but I missed the first one, which one was that?

Television 10%.

TV 10%. Okay, thanks very much; I appreciate -- I'm sorry, just what about if we look at the small panel market, meaning anything under 10 inches, or 9.7 inches? Would you have a growth number for that?

Your question is for the smartbook and small sized tablet?

Yes, right.

We are expecting this should 40% YoY.

That's 40% year over year?

Yes, it's almost the [smartphone].

Right. So it's getting harder to put those in separate categories, the small panel versus the smartbook, and things like that? But -- so 40% there and 50% for smartbook. Terrific. Thank you very much; appreciate it.

Matt Evans, CLSA.

Thanks, again. One of your competitors -- or perhaps two of your competitors seem to be getting good initial demand for 39-inch and 50-inch panels. My understanding is that you probably can't make these in the short term because your capacity is committed, but you might be able to manufacture them next year. Could you comment on that at all?

I think 50-inch, we have a potential to increase volume because industry side we have lots of [10/7] capacity. However, 39-inches, the volume will be limited because there's only [10/6] lines for 39-inches. Also, 50-inches, [global whole set makers] are trying to launch that product, but 39-inches only for -- mainly for Chinese makers. So 50-inches bigger than 39-inches, I think.

Okay. And with regard to the Windows 8 tablets and notebooks, is there a potential to ship notebook panels with Touch in volume in the next 12 months?

Yes, but for the notebook; not InCell, but the different type of Touch.

Okay. Could you give us any sense of the size of that market in the next 12 months? Would that be very niche? Or could that be something that becomes mainstream for ultrabooks in 2013, for example?

Actually, we also invested on that demand with our customers, but our customers also does not have a concrete number yet. So we need to wait and see for the touch notebook demand for the next couple of months.

Okay. And finally, could you give us an update on oxide TFT, what the conversion capacity schedule is, or anything like that; and, in particular, if you'll be shipping any oxide TFT TV panels this year?

Well, that size, right now, internally, we are in talks with that kind of conversion for this finalized year. As I mentioned before, we will give you more clear idea next conference call.

Okay, thank you.

Currently, there are no participants with questions. (Operator Instructions). Matt Evans, CLSA.

I think in the Korean briefing you briefly talked about color filter and array. Could you give us a sense of how quickly you're introducing that for LCD, and what the benefits of that in terms of cost reduction or performance?

On the TV side, with our limited [portion], we adopted the color -- a color TFT process to reduce our processing costs. In first quarter, it is very complicated to quantify our cost reduction because it is a (inaudible) [rate] in [gross] because it is in the initial stage.

In second quarter, we hope it will give a chance to reduce our costs in that product. But, unfortunately, that product portion is very limited at around -- at below 10% among total TV shipment. The total cost reduction intake is not that big, but eventually we will move to that kind of a process. The cost reduction should be meaningful.

And does that allow you to buy cheaper glass for the color filter side?

No. No, we have to use a similar quality glass now, but potentially is possible in the future.

I see. Okay, thank you.

[Kim-Dong Joon], UBS Securities.

I have three simple questions. Firstly, how much inventory did you have at the end of first quarter compared to the last quarter in terms of days?

And secondly, we are hearing that the panel makers have been pressuring glass makers on the price in recent quarters or months, so how did your glass sourcing in price move in the first quarter? That was my second question.

And third question would be, if I understand correctly, depreciation expense from your old Gen 8 fab will start to rollover from only next year, around March or April. Could you please let us know how much depreciation decline we can expect from here, if we ignore the increased depreciation from the new [Korean] fab?

The inventory holding period in Q3 is slightly over four weeks; and first quarter is slightly over three weeks.

And your second question is the price of glass, cost reduction ratio. It's less cost reduction now it is a bit easier than other component size. But, unfortunately, we cannot give you the detailed number, but anyway it is meaningful cost reduction, price reduction for the glass side in first quarter.

Maybe if you have the numbers from our supplier side, this should be covered.

Your third question -- you have too many questions, I cannot remember your questions. Sorry about this. Your third question is the P81, termination, or when will the depreciation will be terminated?

Yes, and also how much?

How much? Actually, it is finalized in first quarter year 2013 in terms of depreciation. And the amount -- our P81 depreciation per quarter, that is KRW190 billion per quarter. So maybe in second quarter next year we don't have any depreciating expense for P81.

How about the P82, is it from 2014?

Yes, that's only 2014.

Thank you very much.

[Marco Tabison], Barclays.

I just wanted to ask a first question on glass prices. I think you mentioned the -- your outlook on the first quarter, but could you give me an idea on the next quarter or the second quarter?

And I just want to make sure that the price pressure would be stronger than the other -- than devices. Am I correct? Those two questions. Thanks.

Your question is specifically for the glass side?

Yes.

So, as I mentioned before, in overall cases, our cost reduction should be low to mid single-digit in a quarter. We cannot give you any specific numbers for specific component side; please understand the situation.

And so this number is for 2Q, or the first quarter?

First quarter, and 2Q as well.

Okay. So the price decline would not be -- would be about the same for first quarter and second quarter?

We hope we can do. We will have the same level cost reduction in second quarter; we try to.

All right, thank you.

Andrew Abrams, Avian Securities.

Just a follow-up on the glass question. Over the last two quarters, have you made any major changes in your glass suppliers? And has that been an influence on price? Or was it just on a general basis that prices declined on the glass side?

Actually, from second half last year, yes, we have some material changes among glass suppliers. Our preference, yes, in the business area are affordable price offer will be a best choice for us if their quality would be seen.

So as far as you're concerned, going forward, you could either stay the way you are or return back to where you were before as long as prices -- price and quality are the same going forward?

Yes, I think all the business relationships will follow the natural common sense.

Got it. Okay, thanks very much.

Matt Evans, CLSA.

Could you talk a little bit about your [open cell] business? Is that increasing this year? It seems to be an industry trend.

Currently, we are not decided what size and how much volume we're going to start. But the open cell business is a business trend we are considering [now this year]; we're going to fix Q2 this year.

And would you say that that's more driven by the customer demand, or more driven by you guys trying to reduce costs?

Most certainly, it's the cases by our customer because they're going to reduce costs using their line, we call the [N plus S] line, mostly [offset] combined line.

Is that potentially moving some of the value from the panel maker to the customer? How should we think about that?

Internally, yes. But considering [OLED], it will change the game.

So is this a risk for LG Display?

I don't think so.

Okay. And another question I had is could you comment on sell through based on any data you may have seen or from internal research in China, and Europe particularly, but also the US? Perhaps you could frame that in terms of what your expectations would have been a month or two ago.

Your question is sell through growth rate QoQ or YoY by region?

Just, really, I'm just interested to know if it's trending in line with expectations, or better or worse, really, rather than a specific number, versus what you would have budgeted for at the beginning of the year, perhaps, or the beginning of the quarter.

I just in charge of TV, so I'm going to talk about TV. And in overall, sell through demand's slightly lower than our expectations. But by region, US is very down in our expectation; and Japan almost the same; however, China is a little lower than our expectations. And we expect that Q2, it will be okay and almost, I think, is slightly higher than our previous expectations.

And how about Europe?

Europe, year 2011 was -- demand is set very low. So because we think Q2 in West Europe demand will grow, also the European Olympics, we expect around high single-digit or low 2D growth rate we are expecting in Europe, including CIS and East Europe.

And so far this year has Europe been in line with your expectations, would you say? Or is that one of the --?

Yes; West Europe a little lower than our expectations, but East Europe and CIS still fast-growing area.

Okay. And could I also ask the same question for notebook and monitor. Perhaps panel demand, but also similar end demand; do you see that trending a bit better than expected three months ago, or better, or worse?

The overall yearly demand was same as before, as we already explained. But Q2 is a little bit strong because most of the customers are trying to build up for the back-to-school demand in hardware since they are trying reduce the costs, [registered] costs, so they are trying to ship by [that time].

And region-wise, like TV, US is strong; and China a little bit lower than our expectations. In case of Europe, still slow, but better than our expectations.

That's very helpful; thank you very much.

Currently, there are no participants with questions.

Operator, if there is no participants waiting, we'll end this conference call.

Yes, you can wrap up the conference call.

Yes. On behalf of LG Display, we thank you for your participation in the first quarter earnings conference call. Should you have further questions, please contact either myself or my colleagues. Thank you.