LG Display Co Ltd (LPL) 2013 Q1 法說會逐字稿

Welcome to LG Display's first quarter conference call. My name is Hee Yeon Kim, Head of IR department. 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 Mobile Marketing. J.S. Park is heading up the TV Marketing department; [Seok Choi] is heading up the IT Mobile Marketing department.

Next slide, please.

Before we move on to the earnings results, 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 about an hour. Before we go into the Q&A session, please allow me to highlight our first quarter results performance and second quarter outlook.

Moving on to revenue and profits on the next slide.

With the weaker seasonal demand and inventory adjustment by some customers, the panel shipments declined by 19% quarter on quarter, and there was some limited ASP decline in selected products. Due to these shipment and ASP changes in first quarter, we recorded a quarterly revenue of KRW6.8 trillion, down 22% quarter on quarter.

Although there was an additional decline in first quarter, we managed to remain in black, with operating profit of KRW151 billion by maintaining our differentiated specialty product portion at around 60% of our revenue.

Operating profit margin was 2%, while we recorded an EBITDA margin of 19%. Income before tax was KRW41billion which reflected a ForEx related valuation loss and interest expense. Net income was KRW3 billion, which included one-off differentiated, deferred tax asset adjustment, and this reflects the new tax policy of the Government. It has recently raised the minimum corporate tax rate to 16% from the previous 14%.

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

At the end of March this year, cash and cash equivalents were KRW3.1 trillion. Inventory recorded at KRW2.5 trillion. Our balance sheet has improved continuously, with the liability to equity ratio recording 133% from 139% in the previous quarter.

The current ratio also improved, rising to 110% from 97% in Q4; net debt to equity ratio recording 16% from 18% in Q4.

Moving on to slide 5 and 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 KR1.2 trillion. Cash flow from investing activities resulted in an outflow of KRW1.1 trillion, and cash flow from financing activities resulted in an inflow of KR262 billion. As a result, the net change in cash was inflow of KRW443 billion.

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

During first quarter, our shipments declined by 19% quarter on quarter to 8.2 million square meters, while ASP per square meter decreased by 4% quarter on quarter to $770. This ASP decline was mainly affected by the relative higher shipment decline of the small and medium size panels compared to larger size panels. The ASP per square meter of the small and medium sized panels are usually much higher than the larger size panels.

Moving on to our product mix on slide 7.

The TV segment represents 43% of our revenue, monitors at 21%, notebook at 9%, tablets at 14%, and mobile applications at 13%. The monitor segment rose in share in first quarter driven by the IPS monitor sales increase, with our various customers' new product launch and growing shares of IPS monitors in monitor market.

The tablet portion declined during first quarter, since the demand for tablet is usually highly concentrated on Q4, and dropped sharply after entering first quarter.

Moving on to slide 8 and looking at our capacity.

Our producible capacity decreased by 6% quarter on quarter to 11.2 million square meters in Q1 since we allocated some capacity for R&D activities and started converting Gen 6 line for LTPS production. When LCD line is converted to LTPS line, then much of LCD capacity is permanently gone.

Next we turn to our outlook section. Due to stronger seasonality and the new product order increase, we expect the shipment increase in Q3 is likely to be a mid to high single-digit percentage level. Panel price is anticipated to stabilize across the board, although some products might face price fluctuation.

Although shipment increase is expected in Q2, we will maintain our utilization rate at a similar level as the first quarter in order to tightly manage our inventory level. Due to the shipment increase and product mix improvement, we expect profit to be increased in Q2 compared to first quarter.

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

As we're looking into the overall market in year 2013, we expect the area based LCD demand will (inaudible) to year 2012. The industry capacity growth is expected to be limited as some major panel makers are converting some LCD fabs to LTPS, oxide and other advances in display lines.

In addition, the larger-sized high resolution panel trends are taking off more LCD capacity. We don't expect a meaningful supply (technical difficulty) at this point, but if the larger-sized high resolution trends go faster, it might have some positive impact on the overall supply/demand situation in the industry in second half of this year.

While we don't expect any significant industry-wide improvement this year, we are committed to solidifying our profitability by continually increasing the differentiated specialty products portion. It was about 50% of our revenue last year, and we are targeting to increase the portion to 70% level this year. In doing this, we will be focusing on improving the value per product unit by continually adopting higher specifications. We anticipate the high resolution, larger-sized trend might go faster this year, and we are committed to fully take advantage of this trend.

In the TV segment, we will highlight our technological advantage in Ultra HD TVs such as IPS, [copper line], and that will be our strategy to boost the sales.

In the mobile segment, we started to supply full HD, larger-sized panels to customers, and we start conversion of LCD line to LTPS line. We will proactively prepare for the growing needs of high resolution, larger panels in the industry.

LG Display will improve the differentiated product portfolio by expanding the portion of additional differentiated products such as touch panels. [Touch] solution for mobile and IT devices will become an additional meaningful differentiated product category going forward.

Production of OLED TV, our ultimate differentiated product, has been carried out well as planned, and we will be focusing on improving the cost competitiveness of OLED by raising the yield rate and product efficiency.

We anticipate that once the mass production OLED TV line with 26k capacity starts ramping up from the middle of year 2014, it will begin to positively impact our profitability.

Our fab investment strategy going forward will be affected by the [size] migration trend as well as the demand growth pace of the new technology products such as Ultra HD TV and OLED TV. Basically, we will convert the existing rise in pace based on the demand growth pace rather than building new fabs.

This ends our presentation for first 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.

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

Just one comment. The press release doesn't seem to be out and the website doesn't appear to be working, so a lot of people aren't getting your financials for this call.

My question is when we look at the second quarter, you talk about 5% to 10% growth. Could you really break that down between smartphones, PCs, TVs and tabloids, and what will be stronger, what will be weaker?

Thanks.

Firstly, sorry for the inconvenience for this conference call.

And then, actually, our guidance for the shipments was mid to high single-digit, not 10%. And among the [applications], actually, TV growth should have been much higher than our average guidance; and then the others will be relatively lower than our average guidance.

Okay. And could you talk a little bit about what you're seeing in terms of the ramp for the May holiday in China and also the 4K TVs?

4K TV in China were worldwide, global. Okay?

May 1 holiday in China, we expect around 10% YoY growth rate. So it's -- Q1 is over -- around 40%, so YoY growth rate. So we expect China's this year's first half demand growth rate much higher than our expectations. So we expect May 1 holiday demand is okay, or maybe good, better than our expectations.

Okay. But how do we think of 4K in total globally? What are you thinking there?

Previous forecast was small because the cost for your HD panel and set price. But recently, last year, people started to talk about low cost sourcing of UHD from other panel makers. So lots of people start to say 2 million or 3 million or even 4 million demand will be possible this year. But our Company thinks around 1 million UHD TV panels will be shipped to the market.

Still we think there are higher possibilities we are watching, but considering the total, the cost of UHD, even low cost models, and also the set price compared -- cost for HD, we think around 1 million, we just start. But even 1 million is much higher than our previous forecast.

Okay. And I just want to be clear, when you look at that 1 million, is that 4K only, or do you consider 4K2K in that number?

4K2K, yes.

Okay, great. Thank you.

Jerry Tsai, HSBC Securities, Taiwan.

(Inaudible), could you share any color of panel price change for first quarter and second quarter, apple-to-apple comparison, please?

In case of apple-to-apple comparison, as we already guided, based on price fluctuations, actually, there is some price erosion in first quarter in some limited applications. And this kind of pattern will be similar in second quarter as well.

We don't expect any overall price decline in first quarter -- we didn't expect any overall price decline in first quarter. And also, we are not expecting any overall price decline in second quarter as well. With the limited applications earlier, we are expecting some price fluctuating.

So just let me make it more clear. So you think the price fluctuation will be relatively stable, right?

Yes.

Okay. Many thanks.

Mr. Jeffrey Toder, CIMB.

A couple of questions, first, utilization rate. You said it will remain the same in second quarter as first quarter. Can you tell us the first quarter utilization rate?

It was low 90%.

Okay. Just to think about these numbers for a second, your capacity has been declining because of the conversion of line 6, as you mentioned. Do you expect your capacity in second quarter to be flat versus first quarter, or is it still falling?

In second quarter, we think our capacity should be similar as the first quarter and our utilization ratio also remains on the level of low 90%.

Okay, makes sense. Okay, and then just to return to some of your comments on OLED TV. You mentioned that you would come on line in mid 2014, and I think you said that it would contribute, start contributing to the business at that time. Could you give us some idea what you're expecting on yields or profitability?

Usually if a new product comes in, especially on a smaller scale, it might not be accretive to your earnings. So you're obviously thinking about OLED differently, so if you could elaborate on that, that would be great.

That's a very tough question for us now. As you mentioned, it is very (inaudible). It is a very tiny [portion scale]. Actually, why we are mentioning about our meaningful profit generation from the mid year 2014, at that time, we will probably be ramping up -- we will ramp up our new OLED facility with the 26K. If we -- with this kind of improved production scale, we might be successful to get some meaningful profit generation. So right now, it's very difficult to mention about [all those] target and the profit contribution at that time.

Okay. Then how do we think about your --? You mentioned meaningful a couple of times, so that means it's a number that we should be thinking about and including in our models. So how should we think about that number? What is meaningful?

Meaningful means actually with this meaningful volume scale at 26K from 8K, actually, we are targeting our user ratio to be reasonable level, maybe similar to LCD; not exactly the same as LCD, but anyway, similar to LCD level. [If that's the] time, we believe we can be successful to generate profits with this kind of volume scale.

Okay. Well, let me ask it one other way, and then I'll stop on this topic. Do you expect your OLED profitability to be higher or lower than the Company average at that time?

At that time -- that time means midyear 2014?

Well, yes, I guess, because that's when you're saying it will have a meaningful contribution.

We hope it should be higher than normal LCD, but this total is depending on our [LED] improvement speed. Actually, LED improvement speed would be in line with our initial forecast. Anyway, there should be profit generation stage.

But what we are trying to highlight for the OLED business, eventually, maybe in coming two to three years later, as our OLED market contribution, or profit generation, or profit market [cycle] should be higher than LCD.

Okay. Thank you. Can I ask one question on CapEx, or would you like me to re-queue?

Yes.

Yes, okay. So my question on CapEx then is so a lot of the CapEx for OLED is this year. Roughly could you give some idea of what percentage is in 2013 versus 2014?

Actually, based on delivery basis of CapEx, maybe 50% of our CapEx we should be focusing on OLED or LTPS for the new technology development. And next year, the portion of the new development should be higher than this year.

Okay. So the portion of OLED, because LTPS will be concluded this year, so the portion of OLED should be higher than it is this year, or higher than 50%?

Higher than 50% next year.

Okay. And do you expect your CapEx level to be similar?

Anyway, CapEx should not be higher than this year because we'll be more focusing on the new technology instead of the LCD side.

Okay. Great. Thank you very much.

Arthur Lai, Citigroup.

Two questions. First one is related to touch panel. You have mentioned that touch panel you think is a higher value product. Could you share any volume or revenue target for this year and how much gross margin we should get?

Thank you.

On that point, unfortunately, right now, we don't have numbers because that kind of business will be materializing second half this year. And we are continue -- we try to choose various -- [one sort of solution] among our various kind of touch solutions. So there will be more clear guidance or clear numbers maybe next earnings conference call. We just try to give you our directional position for the touch business.

Yes. Thank you. And of those solutions, I think there's something so-called [in-cell, un-cell] is related TFT/OLED process, right? And the other is more like a discrete process from the touch panel [maker]. So which technology you will focus in the future?

And do you expect in-cell technology has size limitation? For example, rumors say that over 4-inch in-cell has technology challenge. So can you comment with these two questions?

Thank you.

For first question, actually, as I mentioned before, we have lots of solutions for various kinds of applications. In case of smartphones, we already adapted touch embedded solutions, mainly in-cell. And then in case of tablet or IT devices, the touch solution should be different, because the cost structure and our customer [fees] and demand also is differentiated. So it means our [direction] for touch business will be diversified based on the application by application.

And then your second question. Our touch embedded solution can be extended to be [re-sized], especially for smartphones. We can deliver 5-inch or 6-inch in-cell solutions for smartphones. We don't have any issues for the adoption of touch embedded solutions for the smartphones for now.

Okay. Thank you. And my last question is can you comment about the cost reduction from the material for the second quarter or for the whole year?

Thank you.

Every quarter, we try to reduce our material costs around the low single-digit level.

Okay. Thank you.

Jerry Tsai, HSBC Securities, Taiwan.

Just one more follow-up question. About your first quarter performance, could you give more detail about your non-operating income?

Many thanks.

Non-operating income means recording profit size. Actually, we had some loss related -- aspects related to [operational] loss because actually, first quarter versus Q4 last year, US dollar average rate remained similar.

However, quarter end to quarter end, US movement was about 4%, but because of the (inaudible), actually, our asset valuation loss related to our US dollar debt has increased in first quarter. The debt was reflected in our first quarter recording loss [side], together with our usual interest expense at around KRW400 billion.

That's the main reason. Is it okay for your answer?

Yes, sure. Many thanks.

Brian White, Topeka.

Just want to go back CapEx. What did we say for CapEx growth this year in the actual number?

CapEx remained similar at around KRW4 trillion.

Okay. And when we look at the second quarter, I know TV will outperform. What market do you expect to be the weakest in the June quarter?

The weakest means YoY or QoQ growth rate?

Quarter over quarter.

Quarter over quarter. So which market is the weakest one, your question is it?

Your question is regional basis? Which market means the US, the EU or emerging market, which one is the weakest areas?

What's the weakest? TV, PC, tablet, smartphone? What market will be the weakest quarter on quarter?

For that side I don't actually refer. It's more in medium size demand is not that stronger nowadays, and also small and medium size on seasonality in Q4 was [steadier] than other applications. So this medium -- small and medium sized demand meaningful increases should be in second half this year.

Okay. Do you think it will go down quarter on quarter, or just show very small growth?

In case of our applications that we have diversified the customers base, yes, we can expect this some mild, or mildly increasing income solution, but we -- while some applications, we don't (technical difficulty) any diversified customers, yes, we will have some quarterly decline.

Okay. Just finally going back to the press release and the presentation. When will those be available?

We will go and check it on our system, but there is no problem on our side. We are contacting with the networking system, the Company. So we are get back to you when it's available by the web.

Okay. Thank you.

And if you sending your email, we will directly send you the materials.

Okay. Thanks.

Matt Evans, CLSA.

Could you tell us what the LTPS capacity on the 6G conversion will be and what your target is for that?

That initial capacity for the LG side, that was 50K to 70K which will be converted to 20k as [excess] facility. It is already started from first quarter, and you will see what's the main reason for our capacity drop in first quarter, and it will be finalized maybe in Q4 this year.

Is 20k the design -- so that's the design capacity when you convert [60]? Is that correct?

Yes, 20L is the LTPS design capacity after conversion.

And so far this year, that plan has not changed, presumably? This is the same plan you had three months ago?

Yes, actually, the migration schedule will be -- will remain same. However, the ramp-up, the level of ramp-up, and the ramp-up timing should be flexible based on our customers' demand situation.

Right. So the equipment is in -- is already set, but when you ramp up the equipment, it will depend on customer demand. Is that correct?

In case of a (inaudible), it will be finalized maybe second half of this year. And then the ramping-up will be flexible.

Okay. Thank you.

Currently there are no participants with a question. (Operator Instructions). Dan Malcolm, Viking Global Investment.

I just wanted to follow up on the earlier question just in terms of the 2Q shipment outlook for mid to high single-digit growth sequentially. If you -- can you just break that out by the product mix? So mobile, tablet, PC, notebook, monitor, and TV; just roughly how you expect those to trend relative to the overall shipment guidance for 2Q?

Thank you.

Yes. Actually, continuous -- continue the question for that. But in case of TV, yes, especially with double-digit gross. And monitor and notebook, they should be similar with our average guidance trend.

In the others, hopefully, they should be similar to our average guidance, but we might have -- we don't have any chance to see that kind of [falling growth].

That should be -- I hope that should be enough for your answer.

Okay, yes. So small size, your expectation is that it actually overall could actually grow sequentially in line with the guidance but maybe a little bit later. And I think your point earlier was where your sole-sourced, you're going to have decline sequentially, and where you have -- where you've got a -- in areas where you have multiple customers, you should see growth. Is that what you're -- is that the right way to read that answer?

Yes.

Okay, fantastic. Thanks so much.

And then just in terms of small size for the mobile area, what is your expectation just in terms of screen size as you go through this year? I assume everything you've been doing so far in that segment is 4-inch, or do you guys supply for greater than 4-inch today, and what's your expectation on what that will do the rest of this year?

Maybe still our major portion for the size in -- mobile size is 4-inch, but nowadays, many customers in Korea and China players keep asking about bigger screen size, such as 5-inch or [5.5-inch], even [6-inch]. So this kind of bigger size screen portion will continue to increase.

And this kind of customer portion will be -- will increase from high single digit the end of Q4 last year, and potentially it will be increased to double digit among our total shipments.

Great. Thank you. Did you talk about 10% customers in the quarter, what they were in 1Q relative to 4Q?

Actually, it was around high single digit. It will be close to -- over 20%.

I'm sorry. What will be?

Sorry. Please wait for the check-up.

Okay.

Dan Malcolm, could you repeat your question? We cannot capture your intention. What do you mean --?

I'm sorry. No, that's fine. So did you have any 10% --? How many 10% customers did you have in the quarter? I assume you had at least a couple of 10% customers

Among our total revenue.

That's total revenue, yes; 10% of total revenue or more. And then if they were 50% this quarter, what were they last quarter. You know what I mean?

We have only two biggest customers. One is in Korea; one is in the US. Together with these two customers, sales contribution is already over 50%.

Over 50% for those two?

Yes. We don't have any -- yes. We don't have any double-digit sales contributors.

Yes, right. No, I was just trying to capture the change in the percentage of revenue from those two customers in Q1 versus in Q2.

Okay. In total --

Sorry, in Q4, I mean; Q1 versus Q4.

In total, that was over 50%, but actually in Q4, our US customer was the highest among 50%, but in first quarter, our Korea customer is higher in terms of revenue contribution.

Okay, great. Thank you so much. I appreciate it.

Arthur Lai, Citigroup.

I would like to ask a follow-up question on the high resolution panel. So you mentioned you believe high resolution panel would be the trend in the tablet. In terms of [back frame] technology, will you believe the tablet will change to oxide or LTPS from the original amorphous technology in 2013 from your end?

Thank you.

Actually, we mentioned about the trend of high resolution, not just for the tablet; that's the overall trend for overall applications from smartphones to televisions.

If your question is related to specifically tablet size, actually in this year, with the high resolution tablet, we are okay to support the existing amorphous silicon based.

So to reconfirm, you don't have plan to use oxide or LTPS to the tablet in this year?

Actually, we are developing that kind of tablet back frame, but actual production decision-making will be done between cost increase versus customer value. Actually, if you already know, if we migrate to oxide or LTPS for the tablet side, the cost increase is meaningful, so we have to be balancing between cost increase versus customer value. So based on this kind of -- to accomplish, we will be deciding the production timing for that kind of new technology.

Okay. Thanks.

Dan Malcolm, Viking Global Investors.

Just one last question. What's your expectation for depreciation for the year?

For the year, the depreciation expense will around be KRW4 trillion from previous KRW4.5 trillion.

So it's lower than previously expected. And it will be roughly flat then from first quarter? Is that for the rest of the year, down a little bit?

Second quarter down a little bit in first -- in second quarter and third quarter, and then will come back to the first quarter level in Q4.

Thank you very much. I appreciate it.

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

If we don't have any questions, we will end this Q&A session.

Actually, there is a person who was waiting for his question. Matt Evans, CLSA.

Does that depreciation number include amortization, the KRW4 trillion?

Yes.

And you said that -- I think in a local -- I'm not sure if you -- I couldn't quite hear what you just said, but I think in the local meeting today, you said in 2Q, it would fall about KRW100 billion from the first quarter. Is that right?

Yes.

Okay. And then we'll be third in 3Q and then back, you said, to the first quarter level in the fourth quarter? Did I hear you correctly?

Yes.

Okay. Thanks very much.

So there is no questions further. We will end this conference call. On behalf of LG Display, we thank you for participating in our first quarter earnings conference call. Should you have further questions, please contact either myself or my colleagues.

Thank you for your attention. Thank you.