LG Display Co Ltd (LPL) 2012 Q4 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, fourth quarter earnings results by LG Display.

This conference will start with a presentation, followed by a divisional Q&A session. (Operator Instructions).

Now we shall commence the presentation on the fiscal year 2012 fourth quarter earnings results by LG Display.

Good morning, good afternoon and good evening. Welcome to LG Display's fourth quarter 2012 conference call. My name is Hee Yeon Kim, Leader of IR Team.

On behalf of LG Display, I would like to welcome everyone to our global quarterly earnings conference call. I'm joined by my colleagues at IR team, as well as representatives from Market Intelligence, TV Marketing and IT Marketing. Seong Lee is Vice President of Market Intelligence Department; Kevin Oh is Vice President of IT Marketing Department; and 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.

For your information, beginning with the financial statement, for the year ended December 31, 2012, LG Display is required to give effect to the amendments to K-IFRS number 1001, presentation of financial statement, in preparing its financial statement.

LG Display presents operating profit or loss as an amount of sales that's cost of sales and selling and administrative expense, including research and development expenses. On the face of the statement of our comprehensive income, we have applied the amendments retroactively and reclassified the statement of comprehensive income for the year ended December 31, 2011.

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

Moving on to the revenue and profit on the next slide. With the strong seasonal demand for all product segments, and especially due to the significant shipments increase of smart devices, the panel shipments rose by 10% QoQ in fourth quarter.

The differentiated specialty products portion from FPR 3D to smart devices continuously increased in fourth quarter, with about 10 percent points increase QoQ.

We recorded the highest quarterly revenue at KRW8.7 trillion, up 15% QoQ, and operating profit increased to KRW587 billion in fourth quarter from KRW297 billion in third quarter.

Overall panel price maintained a stable trend in fourth quarter, where the blended ASP rose by 9% and the differentiated specialty product portion increased by almost 10 percent points QoQ.

Operating margin was 7%, while we recorded EBITDA margin of 21%. If we apply the prior year accounting method, operating profit was KRW525 billion in fourth quarter.

Income before tax was KRW503 billion and net income was KRW319 billion.

Moving on to slide 4, looking at our financial positions and ratios. At the end of December 2012, cash and cash equivalents recorded KRW2.7 trillion. Although Q4 shipments increased by 10% QoQ, the utilization rate maintained at the similar level compared to Q3. Thus, inventory decreased by KRW300 billion QoQ, recording KRW2.4 trillion. Our debt recorded KRW4.5 trillion, about KRW200 billion reduction from Q3. And net debt to equity ratio declined to 18% from 22% in Q3. The current ratio rose to 97%, improving the balance sheet.

Moving on to the slide 5, looking at our cash flow. Cash at the beginning of the quarter was KRW2.5 trillion. Cash flow from operating activities resulted in cash inflow of KRW884 billion. Cash flow from investing activities resulted in outflow of KRW603 billion. And cash flow from financing activities resulted in outflow of KRW127 billion. As a result, the net change in cash was inflow of KRW154 billion.

Moving on to slide 6, I would like to go over our performance highlights. During fourth quarter, our shipments increased by 10% QoQ, to 10.1 million square meters; while ASP per square meter increased by 9% QoQ, to $802. This ASP increase was mainly affected by a [10.2%] increase of the differentiated special products portion in fourth quarter.

Moving on to our product mix. During fourth quarter, the TV segment represents 43% of our revenues; monitors at 60%; notebook PCs at 10%; tablet PCs at 17%; and mobile applications at 14%. The tablet PC and mobile segments grows in share in fourth quarter; driven by the significant volume increase in fourth quarter.

Moving on to slide 8, and looking at our capacity. Our producible capacity decreased by 2% to 11.8 million square meters in fourth quarter, since we utilized some capacity for R&D activities during fourth quarter.

Next, we turn to our outlook session. Due to the low seasonality and inventory corrections by some customers, we expect the shipment decline in fourth quarter is likely to be in mid-teen percent level.

Regarding the fourth quarter seasonality, even smart device segment would show significant seasonal demand decline, as its growth rate relatively slowed down, compared to the past years, where it showed very steep growth rates.

The panel price is slightly declining in certain products or segments, when we think the overall price decline could be marginal. We will aggressively control our utilization rates, to effectively respond to the market demand.

Due to these factors, profit decline is expected in the first quarter, compared to last quarter. But we will try to maintain our profitability in black, by continually expanding the differentiated specialty products portfolio, and aggressively reducing costs.

Next, I would like to touch upon our business strategy, going forward. As we look at the overall market environment in 2013, it is difficult to expect the supply/demand situation to be meaningfully improved, compared to 2012. We expect the continual weak demand trend in 2013. However, the industry supply increase could be also marginal this year.

Regarding the demand flow this year, we expect that, after the low seasonality in first quarter, the demand would be improved from the middle of the second quarter, as various set makers will launch new product line-ups. In addition, several companies will execute fab conversions in the second half, which would have a positive impact on the supply side. With the seasonality in demand, the supply/demand situation would be better in second half, compared to first half.

Under this circumstance, we will continually focus on maintaining at the high [position] of differentiated specialty products, to improve profitability, and enhance the business structure. We believe LG Display is well positioned to highlight its technological competitiveness, such as IPS, FPR 3D, and [WLTV] OLED technology, in high resolution and bigger size panels, which are the growing trend in the HD industry.

We will fully leverage this advantage to strengthen our differentiated specialty products right now. We expect the specialty product proportion to be increased to about 70% of our revenue this year from 50% last year. With these efforts, LG Display is committed to maintaining its differentiated competitive edge in the industry.

This ends our presentation for fourth quarter 2012 earnings. And I would like to take your questions. To use time efficiently, please limit to three questions per person. Operator, please proceed the Q&A session.

(Operator Instructions). Nicolas Gaudois, UBS Securities.

First one is, you mentioned in the main presentation in Korea, rolling out plastic OLED in the second half of year. Maybe if you could elaborate a little bit if you expect this to be decent to high volumes, and across one or more customers, basically? And what you're trying to achieve in terms of differentiation by using your plastic OLED; if it's, for instance, unbreakable characteristics. Thank you.

We are planning to start the mass production with plastic OLED in small and medium sizes, in the second half of this year. But our -- the capacity of the plastic OLED is very limited. So we can -- we expect that we can support just one or two customers of the one or two models.

And the differentiation points for plastic OLED, at the initial stage, it could be unbreakable, and it could be very slim and it could be very light. So that is very differentiated points from the glass-based one.

Okay, great. And second question is on your comment on the industry outlook. You talked about fab conversions potentially helping supply in the second half of the year. I guess we're aware of your own conversion to LTPS. Also, of course, you talked publicly again at [CS] about target volumes for TV OLED market in 2014/'15, so potentially, that could drive some conversion.

But do you think this is sufficient, on your side, plus maybe your current competitor doing something reasonably similar, to actually really take out meaningful capacity? And how do you look at this vis-a-vis improvement in efficiency, and, yes, of -- at the Chinese panel vendors, on the other side? Thank you.

This is Seong Lee from Market Intelligence. Besides the OLED, there are many -- a bunch of the new technologies coming on, which will make many panel makers make line conversion.

If you look at the current IPS high resolution, such as the Ultra HD, I believe there'll be some kind of line efficiency reduction in the second half of this year. So it's not only for LED display; it will be about the whole industry. That is the answer to your question.

Yes. No, I guess. So we'll see; it completely depends of the adoption of Ultra HD. And I think we all agree that Ultra HD prices are fairly elevated. I would also suspect the Chinese vendors are not going to do UHD for panel making, of course.

So, with that, and the -- so in terms of modeling of supply, you think that's sufficient to offset increased supply at the new comers, basically, the Chinese vendors? Thank you.

Actually, we are missing your point of question; can you repeat your question, please?

Yes, for sure. So, on top of -- earlier you just mentioned UHD. Now, UHD TV sets are coming in at a fairly high price premium, plus not all panel makers will actually do UHD. So I was just asking clarification whether, in your modeling, when you model supply, you still think these, plus OLED, is sufficient to offset the increase in output we should expect to see from the Chinese panel vendors, plus potentially higher utilization rates as well for Taiwan, plus Sharp as well. Thank you.

Frankly, on the Ultra HD, but also IPS and high resolution for notebook monitor, there are several technologies that require the line conversion.

Anyhow, we believe the supply will be in very tight situation for the second half of this year, because of those kind of -- the supply issue and also some seasonality issue.

Okay, fair enough; that's helpful. And just lastly, a clarification on your assumption for that, what is the underlying LCD TV unit growth rate you're using in your mode right now for 2013? Thank you.

In terms of the set, we believe it will be mid-single-digit, the growth; and area base, mid-single-digit; the unit will be almost flat. That's the assumption about what I just expect.

Sorry, the area growth will be mid-single-digit, and the unit flat, basically, you said?

Yes, unit growth will be low single-digit, or mid-single; somewhere between, yes.

Okay. Thank you very much. Thank you.

Brian White, Topeka Capital.

I wonder if you could talk a little bit about what you're seeing for Chinese New Year in terms of customer expectations. And what is the inventory situation right now for the Chinese New Year, on TVs? Thank you.

As you know very well, there are two different seasonalities in the first half of Q1, which is the calendar New Year holiday season, and also lunar calendar holiday season in next month. As you may be heard, New Year holiday was not that bad; actually, it was, I think, about, yes, some our original expectation.

And also, even though some of the local TV manufacturers stuck with some small inventories, but we believe the situation purely depends on how they can promote with the lunar calendar holiday season, which is coming on next month.

Inventory, we are sharing some inventories at some local manufacturers, so TV suppliers. But overall, the situation is not that bad. And we are closely monitoring the holiday season, lunar calendar year holiday season, which will begin next week.

Okay. And then, how do we think about the cost down in the December quarter? What was your cost down? And then how do we think about cost down for the March quarter? Thanks.

In overall, the fourth quarter cost down is quite clear. But in case of the cost improvement in material level, we achieved the low single-digit percentage, the cost down. So we can continue this kind of trend; low single-digit percentage of the cost down can be continued in the first quarter.

Okay, thank you.

Ben Lu, Seligman Investments.

Congrats on a good quarter; I have three questions. One, you guys guided over KRW400 billion for Q4 operating profit excluding charges; you guys reported KRW587 billion. I know you guys changed accounting in terms of moving some of the FX and provisions to below the OP line. Can you provide a little bit about what was the core upside that you saw in the quarter? And then I have two follow ups. Thank you.

Actually, we gave the guidance over the KRW400 billion operating profit, but that was quite conservative at the time. But, actually, we achieved more than our guidance. So the reason is the -- the first reason is the seasonal shipments is bigger than our expectations in fourth quarter; and the second one is we can achieve the bigger sales in smartphone areas and tablet areas in fourth quarter. So those two reasons are the key reasons to enhance our operating profit in fourth quarter.

Okay. Because I saw your Q4 guidance; I already assumed panel shipments would be up high single-digit; you guys were up 10%. You talked about specialty mix being up about 10 points in Q4, and it sounds like that's exactly what happened. So I'm trying to understand where exactly the upside came from.

That's correct. The shipment was recorded at 10%, better than -- a little bit higher than our guidance. And our product mix is improved up to mid-60% in fourth quarter. So those two reasons are the main reasons to getting a high operating margin in fourth quarter.

Okay, great. And then if you add the mobile and tablet, that was about 31% of sales in Q4. Remind me, I think in the local media you guided that the mobile/tablet mix would be mid to high 20% level in Q1?

Yes, that's correct. The high seasonality could be happening in first quarter, especially in smartphone area and tablet area. So the revenue portion for both segments could go down to high 20%, or, worse case, mid-20% in first quarter. But overall, in 2013, the portion of both segments will be up to over 30%.

Got it. And if you look at your Q1 guidance, you're looking for total panel shipments down about mid-teens, a slight decline in ASPs, so it sounds like you guys are guiding mobile tablet sales probably down, maybe, 30-plus-%. Does that math sound right?

Well, Actually, overall, our shipments, they declined by mid-10%, that is based on -- in terms of the area, so the tablet and mobiles contribution to area is quite limited. So most of the decline is coming from the TV and monitors, and notebook PCs; the larger side is from panels. And, of course, there's -- some decline is expected in tablet and mobiles in first quarter.

We can forecast the market of the tablet and mobile areas both down to double-digit growth, the decline, in first quarter. So we are going -- the over-shipment in first quarter in tablet and mobiles will follow the kind of market trend.

Okay. And then my last question is, DisplaySearch, just I think earlier this week, came out with their updated 2013 forecast. They said that 2013 area growth is only going to be 2.5% year over year, and that TV panel units will actually be slightly down, year over year. Do you agree with that forecast, or do you think that's a little too conservative?

Yes, this is Seong Lee from market intelligence. I mentioned earlier about the mid-single-digit growth in the area TV. I think that DisplaySearch's view is somewhat conservative. If you look at current -- some movement in the larger-size TV products, I believe it'll be more than what DisplaySearch is forecasting at this moment.

Okay, great. Thank you, guys.

Matt Evans, CLSA.

I'd like some clarification on the depreciation policy, please, if possible. Do you intend to change that?

So you mean the depreciation policy about the year, from the four years to five years?

That's right.

Actually, we have not decided to change our depreciation policy. But if we applied the kind of change of the depreciation policy, it could be the start of the 2013. So our -- the earning release of the first quarter of 2013 would have be the April this year; so we think -- we're going to make a decision to change on that by maybe -- within the first quarter; maybe in February or in March.

And I understand from the local briefing that that could be five years, six years or seven years, is that right?

No, this is not correct. We are considering that our -- the current -- the period of the depreciation is the four years, and we are considering to change the period from four years to five years.

The -- but in case of the tax accounting, our Korean -- the financial -- the Observatory is considering to change the standard, the period, the depreciation from five years to six years in next year. So that is the [current] trend of the financial accounting. So we are considering to meet the kind of trend on that.

Okay, thank you. And one more question. Could you give us some guidance for how much LTPS capacity will grow this year, in area terms?

Do you mean the in overall market, or in our side?

At LG display; on your side.

In case of LTPS, we are going to convert [20,000] shift over Gen 6 fab.

Could you give us a sense, though, in terms of how many 4 million unit equivalents, or in terms of square meters, what the year-on-year percentage growth would be?

(technical difficulty).

Okay. It seems like you'll be doubling your capacity, roughly, but I wanted to hear from you an estimate.

Actually, the current Gen of 4.5 fab and 5 fabs capacity equivalent one we are going to add this year.

Okay. Thanks very much.

Arthur Lai, Citi Research, Taiwan.

I think I have two questions. One is on the page 8, about the product mix. You're showing that your mobile device actually gained a share of your total revenue. And if I do the quick calculation, it's about 20% to 30% growth QoQ. Can you share with me it's purely because the unit growth, or by or it's because your product shipments are shifting from the display-only to display with the outer key component, for example, cover glass? This is my first question. Thank you.

The impact that is coming from the both points you mentioned. First of all, there was a unit growth; it happened in first quarter. And the second reason is the our ASP of these mobile, the products, went up in first quarter, with adding some other the functions, like you mentioned the cover glass is touch function.

Yes. So my second question would be follow with your enter is not -- we know the industry goes in [churn] that more and more device are putting the cover glass, for example, only one computer, or for example the smartphone panel. So are you increasing your lamination capacity for the 2013 in order to increase your ROE?

Actually, the touch solution is the area that our customers wanted to -- for us to equip that kind of function, because they wanted to do the -- simplify their [FSCM] if we do the touch the solutions with the display panels. So but we haven't decided yet to -- how much we are going to add our -- the capacity for touch. But there is -- we think this is the way we are going to in the future. But we haven't decided the detailed plan of the capacity expansion.

Okay. Thanks. So I'm good for the page 8. And please remove to page 9. I think you've guided us -- you showed us in the fourth quarter, actually, the Gen 8 maybe producible capacity as it decreased lighter in January. Can you tell us what the driving force for this output, the area decrease, because I think capacity should have a many ways to do the debottleneck. So I expect we continue to grow, and if later continue driving sector to make it go down. Can you just tell us that -- how to model it in the future? Thank you.

Okay. The capacity we show the in the page 9 is the producible capacity. It's not the design capacity. So products, our capacity, can be adjusted by the -- if we allocate our producible capacity to unproducible the purpose, like R&D, was some other regions. So in fourth quarter we allocated some part of our capacity for the R&D purpose. So that's why we decreased our producible capacity by 2%.

So that's only for R&D purpose. So if in 2013 it's, as you've mentioned, you move more Gen 6 to -- from the [corporate] to LTPS, where you did also decrease your Gen 6 capacity, or how you expect your total producible capacity to change in 2013, if we're expecting all this [parties'] migration? Thank you.

The conversion of the Gen 6 capacity to LTPS is not started yet, so we are not fixing the detailed plans of the timeframe to change there. But, presumably, it could be happening in second quarter or the third quarter. So if we converted the original plan of the 80,000 of our existing unofficial (inaudible) capacity, we can get 20,000 of the LTPS capacity, so we're going to lose the 60,000 of the Gen 6 capacity. That is approximately 2% to 3% of our total capacity.

Speak also to the -- this is last question, sorry. So will you do the other process migration to upside in 2013?

We are planning to convert our Gen 8 amorphous silicon, the LCD line to OLED television line, but we -- when we decided it -- until now it's we are going to convert our existing line but what we are not deciding yet is how much it's going to be.

So we are considering the detailed plan of converting to Gen 8 fab. So it could be fixed in this quarter, but we cannot say how much it's going to be. But, for sure, one sure thing is we are going to convert our Gen 8 fab, but I cannot say how much percentage of our capacity could be -- go into the conversion.

Can you please give us (inaudible)?

[Miss Kim Yong Min, Panda Securities].

Actually I have two questions about the local briefing in the afternoon. And first question is about the changes of useful life. As far as I understand there was a question during the Q&A session that the impact on the -- on the impact of those changes and the CFO, Mr. Jung said that the impact for the initial stages, just after the useful life change from four years to five years, the cost will be larger for the initial years. And is that true or did my understanding -- is not correct?

Yes, if we change the depreciation, the policy, from four years to five years we can get some -- the lower depreciation cost for the time being. The impact could be very big in the first year of the change. But we cannot say how it's going to be, so it should be calculated very deliberately. So, yes, it's right; the first year's impact is very large.

Why is that large, because according to my understanding, the useful life is getting longer, which means less cost for each year? And why is the large cost impact for -- just for the first year just after the change?

You mean -- you understand the costs are going to be larger, but it's -- the opposite way; the cost -- the --

The cost will be lower for the initial year --

Lower, and the impact of the lowering is quite big in the first year.

I see, in a positive way right, for your costs?

Right.

I see; sorry for my misunderstanding. And my next question is about the different amount of your reported operating profit and your, let's say, true operating profit. And could you give us more details on those numbers in terms from gain from foreign exchange and loss from provisions, which is larger and how much is the amount for each accounting those items?

I don't know if I can understand what the meaning of the true operating profit. But just the amendments of the financial -- the Observatory change the rules of the definition of the operating profit in financial statement; so that is the sales less than the cost of the goods sold and the SG&A. So the -- our -- the adjusted -- our -- the operating margin, which is KRW575 billion, is calculated by the method.

And the increased amount of KRW60 billion came from the gain from foreign exchange and loss from provisions?

Right. The two big things is the provisioning, and the second thing is the foreign exchange gain and loss from the operating side.

And if I understand you correctly the gain from foreign exchange is larger than the loss from provisions?

Actually, it's harder to say that. But we can say that the overall -- in overall that that amount is around the KRW60 billion.

KRW60 billion positive, right?

Right.

Okay, thank you.

Brian White, Topeka Capital.

I just want to be clear. Are there any one-time negative impacts in the quarter, losses or anything?

Well, it's very hard to project the first quarter's one-time loss. But, under the new rules of the financial accounting, that kind of one-time impacts could be lowered -- could not impact on the operating profit side.

Okay, but there wasn't any fines, litigation, anything in the December quarter that was one-time in nature; this is a pure operating performance that we saw in the December quarter.

So the operating margin before the amendment of the financial accounting was around the KRW525 billion, and the operating margin after the amendment is KRW575 billion. The difference is -- can be understood by the one-off issues.

Okay, got it. Great, thank you.

Matt Evans, CLSA Limited.

Have you been a net beneficiary of -- at the operating level; I'm not referring to translation gains or losses, but just on the operating margin, have you been a beneficiary of the currency moves in the fourth quarter, particularly the weak yen?

Yes. The weak yen impacts on -- impacted on our -- the -- in positive side of our cost structure.

Are you able to quantify that?

It's very hard to quantify that, but we pay the glass by Japanese yen. This is the biggest part of the payment by the Japanese yen. So the portion of the glass is around 20% of our material cost. So you can calculate the impact of the change of yen, impact out the cost structure.

Okay. And coming back to the small panel side, will the -- can you give us some indication of -- for the existing LTPS, fab, how much of that will be used for plastic OLED and how much do you intend to continue using for LCD?

So, you asked about our new LTPS capacity, how much is going to be allocated in the plastic one?

Or perhaps you could say by the end of the year how much of the capacity will be -- of the LTPS capacity will be allocated to OLED, either for R&D or for commercial production.

We did not decide the plan yet, but the [LG construction] is that we are going to produce the plastic OLED at current [SPS] fab, not in the new Gen 6 fab.

And the portion of the plastic OLED we're expecting not that high portion in this year. We are just starting the plastic OLED second quarter of this year, and the portion could be decided by the customers [list pad] for the product. So it's too early to say how much we can make plastic OLED at the fab, right now.

Okay. And is it possible you might change the conversion schedule for the 6G conversion? Is that something that might be reviewed? Some investors might be concerned that you're building a lot of capacity, or do you feel very comfortable with the plan at the moment?

[As it's somewhat] -- we do not have any consent or plan to delay the conversion. We are on track right now.

Okay. And a separate issue with regard to in-cell. There's a discussion in the market, and different schools of thought on how difficult it is to do in-cell at larger panel sizes, particularly if resolutions continue to increase. Can you comment on that, or clarify that issue?

Yes. I'm not an engineer, but according to our R&D people the in-cell -- at this moment, around seven or eight inch area is the limit, a different one to what -- who knows? Later on it could be larger, but at this moment seven or eight inches size is the limit for the in-cell, at this moment.

Okay. And one final question. You seem to have managed the inventory down to a very low level in terms of inventory days in the December quarter. Will that increase in the first quarter?

And related to that, there seemed to be some comment in the local analyst briefing suggesting that you might build inventory early in the year, in order to accommodate a potential shortage of TV capacity later in the year, which sounds quite risky. So could you perhaps comment on that, and correct me if I misunderstood there?

Well, the level of the inventory in fourth -- at end of fourth quarter is quite down; it's less than the third quarter -- end of the third quarter. And we don't have any plan to build the inventory to prepare the shortage of the second half.

Our basic thinking is in, overall, this year the demand is not that high -- not that strong. So we are maybe -- of course, the second half is stronger than the first half, but we don't have any plan to build up the inventory to prepare the second half.

Okay, thank you very much.

(Operator Instructions). Ben Lu, Seligman Investments.

Really quickly, I know you guys have guided previously for Q4 OP to be over KRW400 billion. What is your guidance for Q1 in terms of OP? Do you think you'll be profitable -- significantly profitable?

Well, we rarely give the guidance of the operating profit, but we think that we are going to -- we can expect that we are going maintain the profitable in fourth quarter.

Okay, great. And then my last question is how should we think about the margins for mobile and tablets in Q1? My understanding is that they're on some fully-depreciated stats, and with the decline in production will mobile be profitable in Q1?

Well, it's very hard to say that there are products like the specific product categories, but we try to maintain our profitability in every segment in first quarter.

Okay, great. Thank you.

(Operator Instructions).

If there's no questions, I would like to end the conference call this moment. So on behalf of LG Display we thank you for participating in our earnings conference call. Should you have a further question please contact our IR team. Thank you.