LG Display Co Ltd (LPL) 2012 Q3 法說會逐字稿

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

Welcome to LG Display third quarter year 2012 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, IT Marketing and Market Intelligence.

Seong Lee is Vice President of Market Intelligence. Kevin Oh is the Vice President of IT Marketing department. J. S. Park is heading up the TV Marketing department.

Next slide, please.

Before 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 K-IFRS accounting standards, and are unaudited.

Next slide, please.

This conference call will take about an hour. Before we go into the Q&A session, please allow me to highlight our Q3 results performance and outlook.

Moving on to revenue and profits on the next slide.

With uplift from seasonal demand and launch of new smart devices, the panel shipment rose by 7% in third quarter. In particular, Chinese [growth] in demand was better than expected, with help of government subsidy.

As the high-end premium product portion from XP upgraded to smart device continuously rose in third quarter, we recorded the highest quarterly revenue at KRW7.6 trillion, up 10% quarter on quarter, and achieved operating profit turnaround, recording KRW253 billion.

Although our panel prices showed a stable trend, our blended ASP rose as premium product portion increased.

Operating profit margin was 3%, while we recorded EBITDA margin of 19%. Income before tax was KRW230 billion, and net income was KRW158 billion.

Moving on to slide 4, looking at our financial positions and ratios.

At the end of September, cash and cash equivalent recorded KRW2.5 trillion. In preparation for the seasonal demand and the new product launch, the inventory amount rose to KRW2.7 trillion, while days on inventory fell from last quarter. The increase in the inventory amount is also due to increase in specialty product portion, as that declined KRW104 billion from last quarter, recording from KRW4.7 trillion.

Liability-to-equity ratio fell 4 percentage points to 154%, and net debt-to-equity ratio remained stable at low 20%.

The quarter ratio rose 5 percentage points to 86%, improving the balance sheet.

Moving on to slide 5, looking at our cash flow.

Cash at the beginning of the quarter was KRW2.7 trillion. Cash flow from operating activities resulted in cash inflow of KRW1.2 trillion. Cash flow from investing activities resulted in an ARPU of KRW1.3 trillion, and cash flow from financing activities resulted in an outflow of KRW69 billion. As a result, the net change in cash was outflow of KRW155 billion.

Moving on to slide 6, I would like to go over our performance highlights.

During third quarter, our shipments increased by 7% to 9.2 million square meters, while ASP per square meter increased by 5% to $733. The rise in price reflects the increased portion of high-end specialty products in sales.

Moving on to our product mix on slide 7.

The TV segment represents 47% of our revenues, followed by Monitors at 16%, Notebooks at 13%, Tablet is at 15%, and Mobile Applications at 9%. The Tablet segment rose its share by 5 percentage points to 15% due to new model launch by various customers, combined with the existing tablet product volume increase.

Moving on to slide 8 and looking at our capacity.

Our producible capacity increased by 8% to 12.1 million square meters in third quarter due to P9 [April] ramp up.

Next, we come to our outlook section.

The seasonal demand and volume increase from new smart devices expected in Q4. Thus, we expect a high single-digit per cent rise in the shipments in Q4, and anticipate [our] panel price to show a stable trend.

Next, I would like to touch up on our business strategy, going forward.

Next year the demand is unlikely to improve much farther than this year, as macroeconomic uncertainties persist. Smart devices are expected to grow by double digit, but overall panel demand growth is thought to be around low- to mid-single digits.

However, we anticipate supply situation to improve in year 2013, with a capacity loss due to industry spec conversion trend and new technology adaptation.

As we mentioned, the uncertainties within the macro situation is difficult to escape altogether. However, we aim to overcome more predictable uncertainties, such as the seasonality in supply within the industry.

In order to achieve a stable profit going forward, we will continue with the following actions.

First, differentiated specialty products and technologies such as IPS, [SPR] and yRGB OLED, will be used to maintain and strengthen relationships with our strategic partners.

Second, we will carry out prudent inventory control and CapEx discipline, contributing to improve the industry supply situation. With these actions, LG Display will continue efforts to become a structurally different company among our peers.

This ends our presentation for third quarter, year 2012. And I will 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.

Now Q&A session will begin. (Operator Instructions). Brian White, Topeka Capital.

When we think about the PC and the TV market in the December quarter, where will we see faster sequential volume growth? TVs or PCs?

Mostly TVs. When you look at the PC market, the demand itself will not be that great versus TV. But if you look at our guidance, our guidance [is highlighting single edition] and growth is mainly driven by TV, and also our new product line-up in the Tablet and Smartphone segmentations.

Okay. Now, you had a big uptick sequentially in the Tablet PC market for the September quarter. It's very strong. Can that growth rate continue? Can you deliver a similar quarter-over-quarter growth rate for Tablets in the December quarter?

Yes, last quarter I -- if you calculate around 40% to 50% of Tablet growth from Q2 to Q3. And we --slightly over 50% growth compared to last quarter. And we -- if that same growth rate from Q3 to Q4. But we are not sure about the Q1 yet, but at least the Q4 we think we can expect the same growth rate.

Okay. And finally, when we think about ASPs, it seems like your ASP outlook is a little conservative. Just is there some -- it seems like prices for panels are rising. Is there another dynamic that only allows for your prices to be stable in the December quarter, as opposed to rising?

I think the market price will be very stable overall. Current supply and demand is quite balanced in every segment. Of course, there might be some variance in the level of the supply-demand relationship, depending on the [apparent], but, overall, I think the price will be very stable.

Thank you.

It can be -- yes, please.

Andrew Abrams, Avian Securities.

I wonder if you could specify a little further on the Tab business? Is the growth in fourth quarter coming from additional new models? Or is this running higher volumes on existing products, and you're just beginning the real high-volume ramp?

Both of them. One is coming from existing product line, and the other one is coming from the new product line. So combination of the two segments.

Got it. And would you expect a similar decline in your non-tablet business, meaning maybe ex the TV business in the IT side, in terms of percent of revenue in fourth quarter that you had in third quarter?

Because of the strong measurement in the Tablet side, yes, we are expecting small decline in other segmentation, in terms of revenue portion. But to give you [all proportion of the end] I'm not sure about that.

And the important thing is, while we are decreasing the our other [product] segment, we are trying to reduce some relatively low flat cover product segment, while we are maintaining or increasing the practicable segment [call] for [the main] revenue.

Okay. And what are your expectations for capacity in fourth quarter? Would you be expanding further? Is there room to expand further, since your utilization's running pretty high?

Actually, in case of capacity we are expecting only 2% growth sequentially, and our utilization ratio should have been similar at the third quarter, because we tried to reduce our inventory at a lowest level.

Right. Lastly, could you -- you mentioned OLEDs in your comments. Could you talk a little bit about what you guys are doing there?

Well, OLED means our trends for the OLED television, what you are asking. Actually we are targeting to release some promotional purpose -- we did some promotional purpose. We try to release our 55-inch OLED TV within this year, with wide RDV technology, because it has cost efficiency with the production efficiency. But [S40 scale] should start somewhere in year 2013.

Okay. And there was -- there were -- there was an article recently about the fact that you guys are about to start a mass -- building a mass-production facility. I know you've talked about your general plans. Has anything changed there as far as your TV OLED mass production?

Actually, there's nothing changed materially. We -- our stance for the OLED fact decision making is that we try to check out the market response for our actual release of our new products. Maybe the time segmentation should have been nearer year end or early next year. After then we will give you more detailed ideas for the [fact] investments.

Got it. Thanks very much.

Brian White, Topeka Capital.

I'm just wondering, I know last call you talked about ramping in-cell technology, I guess it was in August. How should we think about yields today? And when can you reach that 90%, 95% yield rate? Is that by the end of the quarter?

Actually the in-cell technology yield, production yield, is being stabilized right now, and we (inaudible) saturation point, but the yield rate you mentioned of 99.5%, we do not expect sooner.

(inaudible) the case, our -- the ratio is around mid to high 90%. It's dream ratio of 99-something%. But anyway we try, we will deliver our in-cell product to reach over 90% ratio (inaudible).

That's what I said, 90% to 95%. So you can hit 90% to 95% by the end of the December quarter. Is that true?

We hope so. We hope so. We are trying to do.

Okay, what's the typical -- like, where are you today? Is it a 60% level or a 50%? Just help us understand the ramp on that.

We are heading to 90% range.

Okay, but do you know where you are today? You're 90% today or you're heading to it?

We are heading to it.

Okay. Where are you today, though?

We are not able to disclose our specific yield rate in public.

Okay, that's fine. In the mobile market, help us understand the mobile market in the December quarter. Is that going to grow as fast as the tablet market?

You mean mobile -- between tablet and the notebook PC?

Yes, just mobile phones, mobile phones.

Telephones? Actually we are thinking that even Smartphone area also growing quite fast, and the volumes -- the growth rate for the mobile phones is slightly faster than Smartphone -- I mean tablet.

Oh really, okay. Okay. And finally when we think about the CapEx for next year, what should we model for CapEx in 2013?

Actually we are in the process for the policy next year, so we don't have any finalized data, but we have some guidelines. Next year CapEx will not be higher than this year. This year CapEx is expected to be KRW4 trillion. So we will try to not to be over KRW4 trillion in year 2013.

Okay. And one thing I want to be clear on. The mix continues to improve, which is great. How much of a positive impact -- I mean as we go over the next year you have a lot of new products ramping. Over the next one to two quarters, as yields improve, is that going to have a meaningful impact on margins, positive impact? Or only a minor impact?

Actually in Q4 you might witness our yield improvement impact. It means our earnings improvement in Q4 could be relatively much higher than the level of third quarter improvement.

Okay, fantastic. Thanks a lot.

Currently there are no participants with questions. (Operator Instructions). [Dan Macone, Viking Global].

I apologize if you guys said this already, I missed it, but did you give your guidance in terms of what you think area shipment growth will be by application for the fourth quarter? So what do you think for IT, what do you think for Notebook and then also for Tablets sequentially, and TV? Thanks.

Actually our total shipment by (inaudible) is high single digits, sequentially. Among the biggest contributor is our new smart devices, such as Tablet and Mobile. Tablet and Mobile shipment growth is quite meaningful; double-digit growth.

And in case of TV, that's around mid single digits, and Monitor -- strangely, our Monitor shipment growth should also be double digit, despite of market economic situation. That's also thanks to our new products release impact.

Is it okay?

I'm sorry. You have new products in the Monitor side?

Yes, Monitors as well.

Okay, and when you say quite significant double digits for Mobile and Tablet, is that -- does that mean greater than 30%, greater than 50%? 20%? Can you frame that for me? I apologize, thanks.

In most cases, yes, it's greater than 30%.

Greater than 30%. Okay. Thank you so much. I appreciate it.

Currently there are no participants with questions. (Operator Instructions). Dan Macone, Viking Global.

Sorry, I had one last question, I apologize, just a follow up. Do you have any thoughts currently on what you think the first quarter will look like from an area shipment perspective?

It's early to mention about the first quarter shipment growth. We expect there's some seasonal impact because usually this is a [low timing] first quarter. However, recently our customers have said that makers and distributors are not that aggressive to accumulate their inventory because of low expectation of the demand or major global economic situation.

So, potentially, if there's no inventory adjustment, the seasonality impact should not be that big. On this [start], our Market Intelligence, Seong Lee, will add on that.

Yes, actually I'm a little more optimistic about the Q1 forecast at this moment, even though we may go into some seasonal -- some adjustment right after the year-end sales. But currently system set sales in channel is quite healthy. And also we can expect some -- currently very strong sales forecast from the market.

Overall, our Q1 will be going as we expect it. So, overall, I think the market will be not that bad, at this moment.

Great. And for the Tablet and the Mobile, for a lot of the new products that you see out there, do you expect that you could see, given that the yields are coming up the curve, that some of these products that launched fairly late, do you expect that you would see somewhat stable demand in the first quarter? Or do you would even see a typical seasonal decline?

It sounds like you don't expect typical seasonal decline really, across the board, but in those areas specifically, how are you thinking about it?

I think, unlike the conventional PC devices, such as monitor and notebook computer, [current] strongly are growing. The smart devices, including tablet and Smartphone, are seeing a little different seasonality.

Still we -- I think the Q4 and Q1, there are many new product launches, but I think we can see some sales growth, month by month, even at Q1.

Wow, okay. So you could even see some growth in those products, then, in the first quarter. That's very helpful. Thank you so much. I appreciate it.

Ben Lu, Seligman Investments.

I just wanted to follow up on one of Dan's questions. When you talk about seeing significant shipment growth for Tablets and Smartphones, just wanted to clarify. I think earlier you said that you expect to see similar Tablet growth in Q4, and I think Q3 was up 40%, 50%, something like that?

For the Tablet?

Yes.

Yes.

So Q4 Tablet growth will be up about 40%, 50%. And I think you said, later on, that Smartphone growth will be even faster than 40% to 50%, correct?

Among Mobile, only Smartphone, yet. (multiple speakers)

And then my second question is --

Go ahead, please.

You guys have guided over KRW400 billion OP in Q4. You guys probably did about, I think, adjusted OP of a little over KRW300 billion in Q3. Can you walk us through how you can increase OP by roughly KRW100 billion, quarter over quarter? How much of that is coming from better yields, lower inventory, etc?

Actually, our biggest contributory is our mix changes. In third quarter our specialty product portion was slightly over 50%. But it will be over 6%. So we are expecting 10 percentage point mix improvement in Q4.

And second contributor is the yield improvement, together with the (inaudible) increase.

Got it, okay. And then are you guys expecting to book any more provisions?

For the time being, we might have some provision issue, but the amount should not be that high, because we will prepare some individual lawsuit case instead of a class action.

So we are expecting small adjust instead of the big punch every quarter.

Okay, great. And then my last question, Hee Yeon, is when will you guys make the decision on potentially lengthening your depreciation period to five years? And then if you can walk us through how we should think about your depreciation expense in Q4, and through 2013. Thank you.

Actually for that side, it's not decided yet. It's just a sketching stage. If we plan to, more seriously, to change our accounting policy, we will deliver the kind of situations to the market immediately. But it is just a sketching stage.

Okay. And then how should we think about depreciation in Q4, and then through 2013?

Actually, this year, depreciation should be TRW4.4 trillion and next year, TRW4.2 trillion, which is slightly lower than this year. And Q4 depreciation should be TRW1.1 trillion.

Thank you so much.

D. S. Kim, UBS Securities.

Firstly, when you -- all you talked about Monitor into fourth quarter, new product, is it fair to assume that it includes something like [all in one] PC, like IMAC? That's my first question.

And second question would be, how much visibility -- I mean order visibility, do you have for Tablets? I'm just concerned because your major tablet customer can do the inventory adjustment at the year end. So I'm already -- over 30% volume growth could be a bit too bullish, assuming this.

The first question, the new Monitor, yes.

And second question, for the Tablet demand. I'm not just talking about one customer, but overall, our customers' demand strong, even Q4 and (inaudible) [earlier] Q1. And I would say we are trying to meet our customers' requirement, utilizing our capacity and resource, full resources. And that's our current situation.

Thank you. Actually, my last question would be, earlier this afternoon, when CFO indicated over KRW400 billion operating profit for fourth quarter, was it after the potential legal provision, or before [assuming] one-off? Can you please elaborate a little bit on that?

Actually, that's our operating profit assumption. It means the kind of adjustment is already reflected, but the level is not fixed yet.

Thank you very much.

Currently, there are no participants with questions. (Operator Instructions). D. S. Kim, UBS Securities.

One more question. Actually, if I calculate correctly, I understand the Tablet PC revenue growth in third quarter was not 30%, 40%; was actually 65%. But can you -- do you still guide similar 60% growth for the fourth quarter, if I understood correctly? Or are you [managing] something 40%, 50% range?

Actually we were talking about the shipment growth, in terms of area, not talking about revenue growth.

Oh, so that means third quarter shipment growth was something like 30%, 40%. Or --?

Yes, slightly more than that.

Okay, thank you very much.

Currently there are no participants with questions. (Operator Instructions).

Actually there is no participant to ask any questions. We will end this conference call. Is it okay to end this conference call?

Yes, you may.

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