LG Display Co Ltd (LPL) 2012 Q2 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'll begin the conference of the fiscal year 2012 second 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 second quarter earnings results by LG Display.

Welcome to LG Display second quarter conference call. My name is Hee Yeon Kim, Head of the 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; and Kevin Oh is Vice President of IT Marketing Department.

Next slide, please. If we move on to the earnings result, please take a minute to read the disclaimer. I would like to remind everyone that results are based on 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 Q2 result, performance highlight and outlook.

Moving on to the revenue and profits on the next slide. During second quarter, the demand in Europe and China turned out to be weaker than expected due to the macroeconomic situation which resulted in some of the set-makers' downward order adjustment. In addition, LG Display strategically cut back supplying the low profitability products. Due to these factors, the shipment increase in second quarter turned out to be lower than expectation.

However, since we managed to increase the portion of high-end premium products, such as tablets and [SPI-3D] in sales, we recorded a high quarterly revenue in second quarter at KRW6.9 trillion, up 12% quarter on quarter.

Our profitability improved in second quarter, mainly due to the increased sales of high-end premium products, so operating loss was significantly reduced to KRW26 billion. If we excluded the provisions for the antitrust loss from our operating line in second quarter, we would have been -- turned out to be profitable.

Operating profit margin was minus 0.4%, while we recorded an EBITDA margin of 15%. Income before tax was negative KRW78 billion, and net income was negative KRW112 billion.

Moving on to slide 4, looking at our financial positions and ratios. Cash and cash equivalent rose by KRW262 billion to KRW2.7 trillion. Inventory increased by KRW371 billion to KRW2.6 trillion. It is mainly due to our customers' downward order adjustment at the end of second quarter affected by the macroeconomic situation.

In addition, the product mix improvement with more high-end premium product portion also affected the inventory amount.

Although our inventory is within the range of manageable level, we are planning to lower the inventory continuously. Debt level decreased by KRW497 billion to KRW4.8 trillion. Net debt decreased by KRW759 billion and thus net debt to equity ratio fell by 8 percentage points quarter on quarter, recording 21%.

Moving on to slide 5, looking at our cash flow. Cash at the beginning of the quarter was KRW2.4 trillion. Cash flow from operating activities resulted in cash inflow of KRW1.8 trillion. Cash flow from investing activities resulted in an outflow of KRW1 trillion, and cash flow from finance activities resulted in an outflow of KRW530 billion. As a result, the net change in cash was inflow of KRW260 billion.

Moving on to slide 6, I would like to go over our performance highlights. During second quarter, our shipments increased by 6% to 8.6 million square meters, but ASP per square meter increased by 5% to $701. The rise in the price reflects the increased portion of high-end premium products in sales.

Moving on to our product mix on slide 7. The TV segment represents 49% of our revenues, followed by the monitors at 17%. Notebooks at 14%, tablets at 10% and mobile applications at 10%.

In case of tablet segment, we managed to supply the new model in full scale in second quarter so it was increased to 10% from 5% in first quarter.

Moving on to slide 8 and looking at our capacity. Our producible capacity increased by 10% to 11.2 million square meters in second quarter. This reflected recovery of some capacity in second quarter which was lost in first quarter.

During first quarter, we temporarily allocated some capacity for the development of differentiated high-end products in new models, and with the compilation of the developing these products, most of this capacity was recovered in second quarter. In addition, the start-up [P98] their production in June, also affected the increase of capacity.

Next, we turn to our outlook section. We expect the seasonal demand in second -- in third quarter, but due to the uncertain macroeconomic situation, the degree of seasonal demand increase remained to be seen. Due to the panel makers' profitability forecasted strategy, utilization adjustment is expected to be continued, thus we expect the controlled balance situation in supply and demand in third quarter.

In this market environment, we are committed to improve profitability by increasing the portion of high-end premium products. We expect a mid-single digit percentage increase in shipment in third quarter and anticipate the panel price to be maintained sound and stable.

Next, I would like to touch up on our business strategy going forward. We will organize our LCD business in an effort to strongly focus on profitability, and have thorough preparation for future technology such as OLED by reading the (inaudible) business areas.

Regarding the optimization of LCD business, we will implement the four action items; first, we will swiftly transform our business structure to strongly focus on high-end premium product categories.

Second, we will slowly define our winning cooperation with our customers, and extend the scale of (inaudible), in order to better prepare for the OLED business structure.

Third, we will minimize our investment in LCD business and convert our partial capacity in [fixed] line for LTPS production with high growth potential areas.

Fourth, we will build a panel plant in China to get closer to our customers in China and improve the cost competitiveness. The capacity of China fab will be limited to the level of the capacity laws in Korea after the fab conversion to OLED.

Regarding the (inaudible) OLED business, we will carry out four action items; first, based on [RGB] technology, we will convert the LCD fab in order to obtain investment efficiency, as well as product and price competitiveness.

Second, we will then be launching a pilot line, using wide RGB technology from second half of this year.

Third, the scale and timing of the additional investment for the [larger size] OLED will be decided while considering the two factors. It should satisfy our need to lead the larger size OLED business area, while reducing opportunity cost in LCD business.

Fourth, we are getting ready for utilizing OLED for (inaudible) display segment as well as preparing for the flat (inaudible) transparent OLED. In case of the small and medium-sized OLED segments, we are preparing the plastic OLED, to satisfy our customer needs in timely manner.

In overall, we will mainly focus on generating profit in a stable manner, rather than emphasize (inaudible) growth.

In two to three years, we will try to make the larger size OLED business a major profit generation contributor.

This ends our presentation for second quarter and I would be glad to take your questions. To use the time efficiently, please limit to three questions per person. Operator, please proceed to Q&A session

(Operator Instructions). Sheng Hong, Topeka Capital Market.

It's Brian White at Topeka. Got a question on utilization rate in the June quarter, and what do you expect in the third quarter?

Our utilization range is around mid-90%. This kind of utilization ratio should be maintained at a similar level. But our policy for the utilization ratio is maintaining very lean inventory situation, to eliminate the economic uncertain situation. So it means we will be very flexible for the utilization handling, based on order trend and lean inventory policy.

So will inventory dollars go down in the September quarter versus the June quarter?

Yes. We try to lower our inventory dollar amount to be lower than second quarter level.

Okay. And how big were the legal costs in the second quarter? You said you were operating profit positive without the lawsuit. How big was that number?

It is slightly over KRW200 billion.

KRW200 billion, okay.

Which is (inaudible) profit side.

Okay. And just finally, as we -- could you give us just a little color around the LCD TV market, the trends you saw in the second quarter? And what's weak in terms of geographies, what's strong, and then what's you're thinking about for the third quarter, in terms of strength or weakness in TVs?

So your question is regional demand in Q3? Regional demand focus, Q3?

Okay. And how about just what you're seeing in Europe, China, US, just trend by geography, maybe?

Okay. In China, due to government subsidy program, we think around 10% YoY growth rate will be possible in China because of October 1 is one of the biggest holiday seasons, so we are quite positive in China.

In North America, continuously 2% or 3% YoY growth rate (inaudible) we think. So, North America is okay.

Europe, we forecast narrowing growth rate in Europe because due to the economic situation. And rest of world is quite positive; we expect it to [grow] 20% YoY growth rate.

Okay. And I didn't hear the North America, where you said it was okay, but what was the growth?

Around 3% YoY.

Okay. Thank you.

Andrew Abrams, Avian Securities.

Just a couple of details. The inventory adjustments that were made at second -- at the end of second quarter which you mentioned. Were these changes in delivery schedules for customers, were they cancellations and were they sort of pre-built by you, and then not taken? And would you see them rolling into third quarter, or have some of them gone?

Usually at the end of second quarter, we have some order adjustment from our customers, because it is end of the first half. So we don't expect it is kind of order cancellation, should be a rolling issue in third quarter.

So that's why we believe we will -- some seasonal demand increase in second half this year. Although the degree of the seasonality shouldn't be -- should remain to be seen. However, we still expect a considerable impact in second half. So it means we don't expect any order adjustment, and that kind of order adjustment to be lowered in second half.

Got it. Okay. And I missed what you said about your Gen 6 conversion to LTPS will reduce the LCD exposure and OLED will be increased to fill that difference, is that correct? So would that imply that you are -- you will outset a Gen 6 type facility for OLED?

It's my understanding [would it be] correct. Actually, I would mention about our plant first. We will convert our LCD fab to amorphous silicon-based LCD to LTPS. This LTPS can be used both for LTPS, LCD mobile phone, together with the classic OLED.

We are planning to use this LTPS for solar (inaudible), LCD and OLED together.

Okay, I understand. And then you mentioned something about the Gen 8 pilot, and I missed that part.

Gen 8 pilot fab will be used for OLED television and LTPS will be used for small sized -- smaller sized display for LCD and LED.

Okay. And what's the max capacity for your Gen 8 fab, the pilot fab?

[8K].

Got it. And lastly, you increased your tablet percentage and you mentioned something about new models being the reason behind that, can you give a little detail there? Was that something that you were specifically working on for a customer or was that part of your new premium products?

Actually in first quarter we have some issues to deliver our smart device to customers. So it is already covered in second quarter, that's why our tablet portion increased in second quarter. This kind of increase should be maintained in third quarter as well, thanks to our cooperation with our strategic partners.

Got it, thank you very much, I appreciate it.

(Operator Instructions). Steven Huang, Yuanta Research.

My first question is about [in-cell]. Could you talk more about the progress of your in-cell? Like the current capacity, the (inaudible) rate and mass production timing? Thanks.

For that area, in conclusion we are ready for the production. But the details related to capacity and production timing we cannot mention about that, because it is related to our strategic partner; please understand this kind of situation.

However, we will deliver our products in the middle of this quarter.

So you mentioned that you will deliver your in-cell panel middle of this quarter? Is that correct?

In this quarter we plan to our (inaudible) embedded solution to our customers in this quarter.

Okay. And the second question is about tablet PC, because from your previous remark you mentioned some conversion [step], either into LTPS or into OLED. My question is how about the progress of your [oxide] technology, as far as I know for the current (inaudible) tablet display, you guys are still working on (inaudible). How about in the future your strategic partner would like to transport to oxide technology, I think that you guys are ready for that transformation, or anything you would like to share with us.

To clarify our LTPS investment, LTPS will be used for small-sized displays, such as the smartphone, instead of tablet, yes. And then we are now our amorphous silicon-base for tablet. So we are also developing oxide for tablet. But the timing for the mass production for oxide tablet is not decided yet.

Okay, got you, thank you.

[Nitin Singhal] from (inaudible).

I was wondering if you could give me pricing and volume trends specifically in the TV segment.

Your question is our volume and price in Q3?

Yes, just year over year, and quarter over quarter. Yes, just the growth trend.

We expect QoQ high single digit growth rates, [area based] Q3, compared to Q2. And the price will be stable.

Okay. Thank you. And what was it in Q2?

Second quarter it was 9%. And it might be close to mid-single growth in third quarter.

Okay. Sorry, 9% quarter-on-quarter volume growth in Q2?

[Area] growth. We don't have any volume growth, we only have area growth, 9% second quarter. And mid to high single digit in third quarter.

Mid to high single digit. Okay. And second quarter [ASPs]? You say ASPs were stable also?

Yes, price will be stable in Q3.

Sorry, just was it stable in Q2 as well?

Yes.

Okay.

And there's (inaudible) 40 inch area -- 42 inch price is going up due to the tight supply. Other size, including big screen size like 54 inch and 47 inch, flat, almost flat.

Okay, great. Thank you very much, all the best.

Sheng Hong, Topeka Capital Markets.

Just another question, profitability in the third quarter, it should be easy, am I crazy to think you can't generate a profit in the third quarter?

Actually if we look at second quarter operating profit, if we take out provisions for antitrust, we already come out -- turn to black at around over -- slightly over KBW200 billion. So we expect our third quarter operating profit should be higher than second quarter in terms of operating profit.

Okay, great. And then when we think about the in-cell ramp here, how big are we talking in terms of size? Are these big panels or are these small panels?

For that area, we understand that all the investors are very interested in that product, but we cannot comment on that issue. But we can just mention we can deliver that product in this quarter.

This quarter. And this was the first time you've been able to deliver it?

Yes.

Okay. And finally costs down, how should we think about costs down in the September quarter, and what was the costs down in the June quarter?

In June quarter our cost reduction was low single digit, so we also expect a similar level of cost reduction in third quarter.

Okay, thank you.

[Dan Malcolm, Viking].

I apologize. Could you just clarify your comments on tablet? How much did you grow tablet in the second quarter, and I think you said you expected to grow the same amount in the third quarter? I was confused.

Actually our sales increased by 2 times quarter on quarter.

By 2 X?

Yes, 2 times.

Okay. And what's your expectation for third quarter?

Sorry?

And your expectation for tablet in 3Q?

Around 40% to 50% level.

Wow, okay that's very strong. Is that -- do you think you're taking market share in third quarter?

We hope so, yes.

So part of that's market share and then part of that's just overall strength in the category.

Right.

Perfect.

Thank you. Great, thank you so much. And then on the notebook side, ex tablets, how did that do in the second quarter, and how are you looking at the third quarter? How do you think inventory is positioned for -- just in that segment?

You mean the notebook area, right?

Yes notebook PC.

Actually the tablet, this year growth is quite strong but generally the notebook is not that -- it's not that strong. And we believe the second quarter reflects a negative growth slightly. But first quarter, because of Win 8 launch we believe we are expecting single-digit growth compared to Q2.

Okay, so your point was that the tablet is growing very fast. It's kind of cannibalizing the notebook?

Yes.

Thank you, okay. And on the monitor side, what are you seeing there for IT monitor for third quarter? How did that do in the second quarter and what's the thought for the third quarter?

In the case of monitor and notebook pretty much the same, the trend, but slightly better in notebook. So still the monitor side negative in Q2 but flat around 10% growth Q3 compared to Q2.

Okay, thanks so much, I appreciate it.

Jerry Tsai, HSBC Securities.

I'd like to know that do you have any forecasts on the [panel] area demand globally for this year? And perhaps maybe you can break it down by seasonality, maybe just first half versus -- second half versus first half, that kind of stuff.

Panel growth for the year we are expecting high single digits YoY overall. In case of the seasonality, we are expecting first and second half seasonality should (inaudible) 53%.

Okay. Do you have some forecast on the industry capacity growth in terms of area, large sized area for this year?

Capacity growth should be mid-single digit this year.

So in other words that capacity growth matches with the panel area growth?

Yes

Okay. Also another question is that I wonder if you have seen any signs of size migration happening in the LCD TV panel. If you have seen it or you believe that your customer is going to start to call in those bigger size TV panels in the second half of this year?

Your question is big screen size (inaudible) ratio, or --?

Well I'm just on about in terms of the average size of LCD panel you shipped, for the TV of course, do you see an increase in size?

Yes in terms of average size it will continuously increase.

Can you give us some idea like how much it has grown so far this year, just approximately in terms of the diagonal inch?

Firstly I don't have any data now.

Okay, that's fine. And last question is --

You can contact our IR team.

Okay well I'll contact the IR team later. My last question is, since you are ramping up this advance technology, this in-cell technology in this quarter, do you see any chances that the margin could be impacted in some way due to the initially -- potentially lower [yield] initially?

Actually we are not sure yet. We are just at the stage of finishing the development, and we are about to start mass production so we need to see the initial yield rate for the time being.

Sure, I understand. Thank you.

Claire Kim, Hyundai Securities.

I just want to clarify my understanding on the production line convergence. If there is any convergence from amorphous silicon line, then how much would be the capacity reduction for LTPS and on oxide line? Is there any number of difference between oxide and LTPS, or are they just the same as say 70% or 40% capacity reduction from the previous amorphous silicon line?

There is [usually] a gap between LTPS and oxide convergence. In case of oxide convergence, the capacity roughly is expected to be 20% to 40%. And in case of LTPS, the capacity loss should be 70% to 80%.

Then is there any difference between generations, let's say Gen 6 and Gen 8?

That's not because of the generation, that's because of the complication of the production. In case of LTPS we need a more (inaudible) process, and need more complicated equipment so we can read it. We can lose our production area and we will have a more [long weighted] time because of that. The capacitors for the LTPS should be much bigger than oxide.

Okay, thank you very much.

(Operator Instructions). Matt Evans; CLSA Limited.

When would the LTPS conversion begin, and how long will that take?

Our major CapEx will be spending in next year in this, only next year we will start the conversion for the LTPS.

And do you need to ramp-down the whole fab, or is it done in stage by stage, over a number of quarters?

Stage by stage.

Okay. And is that line currently used mostly for monitors?

Only in notebook.

And that would shift on to the AG capacity, will it, on the monitor side? Or where will you accommodate the loss production?

That will be shifted to another [fab].

But naturally, it will reduce the monitor [percent] mainly.

Okay. And there's probably some low-margin products where you can just lower your shipments in total, I guess, as well, right?

Yes.

Okay. That's helpful, thank you.

Andrew Abrams, Avian Securities.

Question on open cell. How much have you -- or do you expect to ship in open cell, relative to last year? Is this going to be a big increase for you guys this year? And can you help us a little bit understanding the cost structure, given the fact that you don't put a backlight on it? How does your margin work, in terms of open cell production?

Our open cell strategy's clear. We're going to follow the market trend, and we're going to open our cell business to our customer, based on profitabilities. So some models are low-end models, and small-size screens. In that case, cell business is sometimes better than LCM. And our portion of cell business, this year is around 10%.

I'm sorry, what was the percent? 10%?

Around 10% this year.

Okay. And how much different is that from last year? Wasn't it roughly the same last year?

Last year was [10% to 12%].

And lastly, just one more question on the OLED production. On large panels you mentioned that that was going to be -- they were going to be produced in the Gen 8 pilot line. Would small panels be produced somewhere else? I know the back plane will come out of the LTPS conversion, but where would the small panels actually be produced, the OLED panels themselves?

Actually we already have [4.5] generation as (inaudible) with OLED, for small size mobile displays. So small size will be provided from 4.5 generation fab.

And what's the capacity of that facility for OLED?

4.5 generation?

Yes.

That's around [12K].

[12K]. Thank you very much.

Steven Huang, Yuanta Research.

You mentioned that for your notebook panel in third quarter, the growth rate would be rather muted because cannibalization effect of tablet over notebook?

And my question's how about a high-resolution panel for notebook? I mean the QoQ growth rate in third quarter over second quarter.

Actually I do not have detailed figure at this moment, but if you need it, later on we are going to provide information through our IT team, but the trend is there. The high-resolution, we are getting a more demand for the higher resolution nowadays.

You mean, that's for notebook application, right?

Right.

Okay. The other question is more of technology-based. Because I don't know if you have this kind of internal number that's talking about Embedded DisplayPort. So if you do have, would you like to share with us that, what's your view of the penetration rate of Embedded DisplayPort in your notebook panel for this year and 2013?

Unfortunately I do not have a detailed number right now. Sorry.

Okay. Thank you.

Let me clarify previous questions. So [portion] in television last year, that was 5%.

Around 5%, yes.

(Operator Instructions). [Siu Chung Qai], Sanford C. Bernstein.

I have a question about CapEx. I was wondering if you can give us again the guidance of -- for this year, and also for next year if there's any in mind?

CapEx we feel should remain [KRW4 trillion] as the release of last quarter, and next year CapEx should also be similar this year, although we will include China fab investment and LTPS conversion, together with the OLED conversion. Our CapEx should not be over this year in year 2013...

And the second question I have is that at Q2 this quarter your producible capacity by area is about 11.2 million meters square. So I was wondering, can you give us an idea what would the total capacity be by area in Q2, 2013, one year from now, from 11.2 million meters square? What would it go to?

One year from now -- I only have the numbers at the end of this year; they should be [12.7].

[But in this], one year from now, they should be very similar.

And after the conversion of our LTPS, it is highly potentially the capacity for [ours] should be less than [12.7]

Got it. So in terms of shipment, then, we are at 8.55 this quarter. What do we expect it by Q4?

Sorry?

So I think for shipment we are at 8.55 million square meters, for this year, right, in terms of area shipment, in Q2 -- sorry, Q2.

So I was wondering, for Q4, 2012, what is area shipment in million square meters?

Your question is for (inaudible) in fourth quarter. For fourth quarter, if your question relates to fourth quarter, we don't have the numbers.

Okay. All right. That's all I have.

Matt Evans, CLSA.

I was interested to know how you see the smartphone display market playing out? What do you think the market size is for high resolution LTPS panels, with resolution over 300 pixels, or 350 pixels per inch? The reason I ask is it seems that there's potential for oversupply in that segment in the next two years, because the high-end market is no longer growing. So you're going to have to push those units into the $300 to $400 smartphone segment. It's not clear to me whether that segment can accommodate that high-price panel.

I do not understand your question, frankly, but we think the smartphone area continues to grow, because in the feature phone, is going to be rapidly reduced; and smartphone area is going to take those segments. So we do not see much concern on smartphone growth right now.

And if I may add some comments on that; actually the penetration of the smartphone in the mobile phone is around 35%. Still it is below 40%, so we still expect, next year, smartphone's annual growth should be just slight over 30%.

So we'll have a chance to increase our market position in the smartphone market.

But most of those -- most of the growth you're referring to is at the low end of the market, it's not at the high end of the market, where smartphones are priced above $400. So my concern is that that market will be fulfilled with amorphous silicon displays, because if you put a $30 or $50 -- sorry, a $30 or $40 display into a $200 handset, it doesn't make any sense.

Fortunately our big customers are always released to specialty product even in the commodity areas. So we believe our (inaudible) should remain in the high-end, premium product areas, in accordance with our continued cost reduction.

Okay. Fair enough. Thanks.

(Operator Instructions). D. S. Kim, UBS Securities.

Thank you for taking my question. I just wanted to clarify one thing. How much would your current LTPS capacity -- I mean, the monthly input for the [AP] to fab, if I understand correctly?

Design capacity is the [60K].

60 or 50, sorry?

60.

Okay, thank you. And do you have any utilization rate for this data currently?

Mostly more than 90%.

Thank you very much.

Jonathan Hwang, KDB Daewoo Securities.

Thank you. I've got two quick questions; the first question is, what is your total capacity for Gen 6 line, and how much are you converting that to LTPS?

My second question is, how many 3D SPR TV panels did you ship in the second quarter, and what was that in terms of percentage? And what would that be in the third quarter? Thank you.

So first question, our total capacity for Gen 6 is around [410K] among them maybe around the 40% (inaudible) could be converted to LTPS. But (inaudible) [20K] if we finalize (inaudible) LTPS.

And your second question is the portion of SPR?

Yes, yes that is correct.

Q3, right? Q3 result, around 40% of our total shipments, through the SPR.

What was that in the second quarter?

Second quarter, slightly less than 30%.

Right, thank you.

Andrew Abrams, Avian Securities.

Just two clarifications. The quarterly producible capacity by area, you mentioned for fourth quarter, and I missed that number; could you give that number again?

12.7.

I'm sorry, what was that?

12.7.

Oh, 12.7, okay. Great, so you will move from 11.2 in second quarter to 12.7 by fourth quarter?

Yes.

Okay. And what you said on the Gen 6 line, total capacity - what was that number?

[210K].

Oh, [210K]. Sorry, thank you very much. I appreciate it.

Currently, there are no participants with a question. (Operator Instructions).

If there's no questions, from now on we will end our conference call.

On behalf of LG Display, we thank you for participating in our second quarter earnings conference call. Should you have any further questions, please contact either myself or my colleagues. Thank you.