LG Display Co Ltd (LPL) 2013 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] begin the conference of the fiscal 2013 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 of the fiscal year 2013 second quarter earnings' results by LG Display.

Welcome to LG Display second 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. J.S. Park is heading up the TV 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 K-IFRS accounting standards and are unaudited.

This conference call will take about an hour. Before we go into the Q&A session, please allow me to highlight our Q2 results' performance and Q3 outlook. Moving on to revenue and profits on the next slide.

Due to the seasonal demand growth, the panel shipment increased by 9%, quarter on quarter, and there was a slight ASP decline in the second quarter. However, the blended ASP decline was significant since the small and medium-sized panel portion decreased steeply, which also resulted in a revenue decline at around 3%.

We recorded a quarterly revenue at KRW6.6 trillion, down 3% quarter on quarter. Operating profit increased by 142% quarter on quarter, at KRW366 billion, due to the continual cost reduction and the improved productivity, as well as the depreciation and cost reduction compared to Q1.

Operating profit margin was 6% (sic - see slide 13 "5.6%"), EBITDA margin was 20%. Income before tax was KRW162 billion and net income was KRW105 billion.

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

At the end of June, cash and cash equivalents was KRW2.9 trillion, similar to Q1. Inventory recorded at KRW2.4 trillion, down KRW133 billion, quarter on quarter. Our balance sheet has improved continuously, with the enhancement of our profitability. Liabilities to equity ratio recording 118%; net debt to equity ratio recording 11%; current ratio has improved, rising to 113%.

Moving on to slide 5 looking at our cash flow.

Cash at the beginning of the quarter was KRW3.1 trillion. Cash flow from operating activities resulted in cash inflow of KRW1.3 trillion. Cash inflow from investing activities resulted in an outflow of KRW826 billion, and cash flow from financing activities resulted in an outflow of KRW630 billion. As a result, the net change in cash results was of KRW124 billion.

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

During second quarter, our shipment increased by 9%, quarter on quarter to 8.9 million square meter. ASP per square meter decreased by [15%] quarter on quarter to $657, due to the significant decline of the small and medium sized panel portion. ASP per square meter of the small and medium sized panel is much higher than that of larger sized panels.

Moving on to our product mix on slide 7.

The TV segment represents 51% of our revenues; monitors at 21%; notebook at 11%; tablets at 7%; and mobile applications 10%.

Since our main smart device customers new product launches are mainly scheduled for the second half of this year, tablet and smartphone portion declined in Q2 compared to Q1. TV portion lowered significantly in second quarter, due to the increase of the larger specialty TV panel shipment, as well as increase of TV panel shipment to China.

Moving on to slide 8 and looking at our capacity.

Our producible capacity increased by [3%] quarter on quarter. During the quarter, we were able to convert some capacity for panel production, which was previously used for R&D activities. Compared to Q1, the working day increase in Q2 also affected the capacity increase.

Next, we come to our outlook section. We expect the shipment increase in third quarter is likely to be low to mid-single-digit percentage, since the significant shipment increase in tablet and smartphone segments are anticipated.

ASP is likely to decline for a short time, but is anticipated to stabilize from the mid-quarter. Actually, thanks to the tablet PC and smartphone volume and mild ASP decline, actually we are anticipating our blended ASP is likely to increase significantly in third quarter.

We understand that there is some concern in the market, related to the termination of the subsidy program in China, and how this will affect the demand. We believe these issues could potentially lead to the [unit-based] demand declining in the second half to a certain degree.

However, the area-based demand is likely to be increased, since the size migration is continually taking place. We expect that the capacity increase in the second half, compared to the first half, will be limited and there will be better seasonality in the second half versus the first half.

Lastly, we will mention our strategy. As the LCD industry has entered the slow growth pace, we are going to put force and efforts to continually implementing the differentiated product strategy, which will mainly focus on increasing the value of each product unit.

In case of ultra HD TV, we have been executing high end product strategy so far, with the introduction of 84 [inch] in Japan in last year, and 65 inch and 55 inch panels in June this year.

Going forward, we will try to diversify our model lineup to respond to both high end and medium market needs.

Regarding tablet and smartphone segment, we will launch various high resolution [premium rated] products, to maintain our leadership position in the market.

Regarding OLED, our ultimate differentiated product, we will continually focus on obtaining an OLED space that will generate profit from this business as early as possible.

In case of OLED TV, the yield rate has been continually improved, in line with our internal plan, and the setting up of the second OLED plan, which is M2, has been carried out on schedule.

Regarding the plastic OLED, the mass production will start in the middle of second half.

In order to effectively carry out our differentiated product strategy, our capital spending will be focused on OLED and TPS, and other [advantageous display products].

This year, about 80% of our CapEx will be spent on these areas, and also our capital amount should be similar to last year, which is at around KRW4 trillion.

This ends our presentation for second quarter, and I would be delighted 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.

Yes, the ASP decline of 15%, I just want to be clear, that's all from tablets and smartphones?

Actually, if you look at the apparatus decline, we see it at around 2% in second quarter. However, as you already know, our ASP per square meter per small size, which is tablet and smartphones, is usually higher at around [7 to 8 times]. So the reduction of the small sized sales decline gave us our ASP decline at around 15%.

Lastly, actually apparatus decline, which is 2%, and the remaining 13% comes from our revenue mix.

Okay, that's helpful. And when we think about -- you said in the third quarter you expect a significant increase in tablet and smartphones; number one, will those be your strongest markets in the September quarter?

And when you say significant, are we talking up 10%, or we talking up [50%]?

Actually, if we look at our sales mix, our second quarter, tablet sales portion declined significantly. Right now, our tablet and smartphones sales mix declined significantly. Now we are expecting that kind of mix will be similar as the first quarter. So you can reasonably assume our volume increase in third quarter, based on our sales mix guidance.

Okay. And finally, China, so the China subsidy program ended at the end of May, is this going to have a meaningful impact do you think, on the third quarter, meaning is there excess panel inventory in China, because this subsidy program was allowed to expire?

In short term, for Q3, it will impact (inaudible), but I don't think it will impact Q4 in next year. And you mentioned excess inventory in China, that means retailer or cell maker or panel maker?

Everyone.

Everyone?

Yes, if no-one's buying, it impacts everyone.

As I know panel maker investment level is normal, and cell maker it depends on brand, but as [there is just] one brand has excess inventory, and most of our customers' inventory level is slightly higher than normal. So our customers doesn't care inventory level now. They just care the [rate] demand in the short term, before our October 1 holiday.

Okay, great. Thanks a lot.

Nicolas Gaudois, UBS.

Maybe just a follow-up to start with, on the ASP question. Would it be possible to just have an order of magnitude or how we look these days at mobile, tablet, ASP per square inch, per area, versus TVs, just to get an order of magnitude of how the mix can, indeed, affect so significantly, in your case, ASPs in a given quarter?

As I already mentioned, ASP per square meter for mobile and tablet is quite high, because it's quite expensive [display]. ASP per square meter usually for smartphone is as high as 7 to 8 times, (multiple speakers).

Sorry, I wasn't sure I understood that correctly. That's perfect. And the second question is on the cost side. Even if we strip out the position you had, COGS coming down quite nicely, we obviously had about 15% decline in the Korean won to yen in that quarter sequentially.

So leaving aside hedging, how much of that COGS decline came from a) currency affecting your supply from Japan on your side in terms of costs? And b) actual price reductions like for like in these areas or anything else in terms of efficiency, [glass] efficiency levels or OELs, of course? Thank you.

Actually, yen weakness was (inaudible). However, when you're looking at our bit of mature portion of yen, transition is not that high actually. It is 10% to 15% of our (inaudible), so the impact was not that high.

Okay, that's great, so that's one. And then if you had to balance, basically, [influence] and efficiency you talked about in the Korea meeting versus just price declines for ex-currency, obviously, for glass, polarizer etc., how should we think about it?

Could you ask again your question? I don't understand what you mean exactly.

Sure, of course. Since you have this understanding that the yen factor was not that material, how should we qualitatively think about the importance in COGS cost reduction of, on one side, improved combined efficiency and, on the other side, actual reductions in constant currency terms of price [inputs] for glass and other metals?

Let's put in this way. If you look at our costs of goods sold, the percentage of our GP margin improvement, actually 40% or 50% comes from our depreciation costs reduction, and the remaining 20% comes from our mature cost reduction. And also, the remaining 20% or 30% comes from our yield improvement.

Okay, that's great, excellent. And last question, so you guided for area low single-digit to mid single-digit increase. Obviously, within that we have quite an increase on the mobile side. So if I was to leave the mobile side aside and just focus on large panels, how should we think about the third quarter?

If we take out mobile and tablet side, we believe the large side such as TV shipments should be flat quarter on quarter. Is that the correct answer for your question?

Yes, that is fine. Thank you very much.

Brian White, Topeka.

Yes, I've just got a question on the others. If you look on the income statement, you get others of, it looks like KRW288 billion. What is that?

Others, your question is related to the [recorded profit] side, actually our recorded loss increase?

Yes, so just explain what that is KRW288.716 billion?

Number one reason is our FX-related valuation loss. Actually, we have a $2.5 million [debt]. $1 rate exchange was around KRW41, so we have KRW100 billion are FX-related valuation loss.

And also, we have interest expenses amounting to KRW30 billion. And the remaining was our [retail bond] amount related to antitrust issues.

Okay. And the FX gain was just, what strength in --

FX loss, FX valuation loss.

Okay. And the TV market versus the PC market in the third quarter, what do you think will outperform? TV will do better than PC or PC will do better than the TV market in the third quarter?

Actually, augment itself if there's some seasonality. However, nobody wants to carry inventory at the expectation of the seasonality. So all the trends is similar, but in our basic assumption for the third quarter, IT is slightly -- IT is better than TV because in second quarter, there's no specific demand event for the IT side. But in the case of TV, there's some specific events came from the China side. There is some inventory adjustment for shorter period. So looking at the numbers, unit shipment number itself, IT is better than TV.

Okay. So TV will actually go down quarter on quarter?

It's almost flat, because our guidance is -- it's almost flat.

Okay. And just when you look at the smartphone market in the second half of the year, are you seeing 5 inch smartphones becoming more prevalent in your portfolio? When you're ramping for customers, are you seeing an increase in the number of 5 inch phones in second half versus first half? Or is about the same?

If you only focus on the 5 inch segment, yes, 5 inch demand was much higher than [first half]. However, the 5 inch is not the major product for us.

Okay, great. Thank you.

Currently, there are no participants with questions. (Operator Instructions). Ben Lu, Seligman Investments.

I have a few questions, one just housekeeping. Can you talk about how depreciation will do in Q3 and Q4?

In Q3, we also have some depreciation [cost] reduction. This will be around KRW60 billion or KRW70 billion. And then depreciation will come back to maybe second quarter level.

Okay. And if I exclude the depreciation reduction of about KRW150 billion in Q2, and I think the FX benefit of about roughly KRW100 billion, it looks like your core operating profit was down sequentially. Can you talk about what drove that?

Yes, definitely that's true. Actually, as we already [recognized] our tablet and mobile, sales declined significantly. With this kind of a sales reduction and sales loss, all of the other business in this kind of sales loss from the small size and smart device, our existing business such as monitor and notebook side, that divisions should improve significantly.

Okay. So with small and mid-size panel ASPs up significantly next quarter, that should get back to profitability?

Yes.

Okay, great. And then also just in terms of some of the newer capacity you're talking about. In terms of China FAB, is that still on track to ramp some time in the middle of next year, despite the end of the China subsidies?

Yes, we will do our plan for the China FAB. Actually, we don't expect the subsidy program could impact the China Main for a long time. The subsidy program impact will be a short-term issue within this year.

Great. And, Hee, can I ask one last question?

Yes.

Are you seeing any LCD driver IC issues for the small to mid-sized panels?

Actually, we also (inaudible) however, our order trend would not impact that kind of (inaudible) we don't know.

But there's no issue with producing [retina] display on amorphous silicon panels, right?

We don't have any issue for our all kind of products, only for the retina display. We don't have any (multiple speakers).

Okay, great. Thank you.

[Vivian Chan, AllianceBernstein].

My question is about your utilization rate in third quarter. Could you comment about are you going to change your current utilization rate in third quarter?

Our utilization ratio in the second quarter was similar at around the low 90% in second quarter. In third quarter, [as you know], the TV utilization ratio should have been lower, but as we already mentioned, our small size [portion] should kick in significantly, that the utilization ratio should increase.

Okay. And my second question is regarding to blended ASP. I know, on your guidance, you are saying that the ASP will drop quarter on quarter, but is that for the like-for-like basis? Because if you're considering the blended mix change, if you look at the ASP from the blended perspective, do you think -- because things are -- smartphone and tablet, they are per inch, per square meter. ASP is much higher. So is the blended ASP will also drop, or you think what kind of direction the blended ASP will go?

Yes, that's a very good question. Actually, our guidance is based on apple to apple basis. Apple to apple basis, our expectation for the price should decline a bit. However, blended basis should increase meaningfully in third quarter, backed by sales increase from smart device.

Okay. And my last question is, for your third quarter capacity, do you expect capacity to further grow, or you think capacity will be relatively flat quarter on quarter?

Third quarter capacity should be flat sequentially.

Okay. Thank you very much.

Currently, there are no participants with a question. (Operator Instructions). Ben Akrigg, F&C Asset Management.

Can you talk about your LTPS capacity expansion? Your [6G FAB] is due to come on early Q4, I think. How quickly are you ramping that? You're supposed to roughly double your capacity, and clearly, your main client is unlikely to double their handset shipments in, say, the first half of next year, compared to the second half of this year. So how are you going to ensure utilization is high enough to make it reasonably profitable?

Actually, we are planning that around 50% our new facility will be ramped up in Q4. And then the remaining will be done in accordance with our order increase. It means 50% will be ready in Q4 this year.

And utilization will be 80%/90% with that schedule, you think?

Actually, based on our 50% ramp-up schedule, utilization ratio should be [full].

Okay. What's happening to pricing for the higher value smartphone and tablet panels? Obviously, you compete to a large extent with Japanese companies, and they've obviously seen a currency benefit recently.

In addition, both you and Japan Display are expending LTPS capacity significantly; Sharpe seems to have sorted out some yield issues, at least on its oxide FABs. So there's basically more supply, and your competitors have got a better currency tailwind. So what's happening to pricing there, please?

Actually, we cannot mention about the pricing issue for now, as we have very limited customer base for that product segment. [Please understand this].

In general, is there a lot of pressure, or is it being offset by continued resolution upgrades, and so on?

Actually, (inaudible), we don't expect any price -- [CDL] price pressure at this point.

Okay. And in terms of your OLED, your M2, you're switching that from an existing amorphous silicon facility, aren't you, I believe? Can you remind me how much 8G amorphous silicon you're taking out over the next few quarters, and how much OLED capacity will be added, please?

Actually, we already announced 26K into [CAP83] facility for OLED [partition] equipment. But in case of oxide conversion to meet the 26K partition facility, we have two scenarios. One is 26K at (inaudible), and second scenario is step by step [path] to meet 26K partition.

So the migration speed will depend on LCD demand situation. Actually, we have to consider [potential] cost for the loss of LCD capacity. So maximum capacity for OLED should be 26K. Our LCD capacity conversion will be determined by the LCD demand situation.

Okay. And when do you envisage that 26,000, or a reasonably high level of that, being fairly fully utilized? Do you, with your clients, have a product roadmap?

Actually, the full ramping up period is not decided yet, because it will totally depend on our (inaudible) [improvement] speed. So we will give you more clear idea maybe first half next year, because our ramping up timing for second OLED facility is in the middle of next year.

Okay. I suppose, if I can sneak in a final quick question, just on the depreciation side. You said that Q4 goes back up to the Q2 level, which is just a bit under KRW1 trillion. Will that be increasing through the first part of next year, because you will have more LTPS capacity perhaps? But then again, I guess some of your 8G capacity that you're adding in 2010 will roll off. So in aggregate, will depreciation be trending flat, or trending higher or lower through 2014?

It's very early to mention about that. Actually, our CapEx for this year is KRW4 trillion. And then next year, CapEx should be similar or smaller than this year. And then, we also have another depreciation closing plan for second [8] generation first quarter next year. So we --

First quarter, did you say?

The first quarter next year. So with this kind of combination, [how come our] depreciation [seems to] decline next year. But for this point, we will get back to you with the correct numbers.

Okay. And you said CapEx might be slightly lower next year, did you say?

For now, we expect. (Multiple speakers) the CapEx will be mostly focused on the new facility (inaudible) or the conversion rate, [LTPS] conversion. And our actual investment should be very limited. So for now, we only have second phase OLED facility, so our CapEx will not be that high next year.

Okay. Thank you very much.

Currently, there are no participants with a question. (Operator Instructions). Ben Akrigg, F&C Asset Management.

Hi, sorry, I just wanted to see if you've still got some time and I'll sneak in another question. In terms of the increase in Q3 volumes from the higher value mobile and tablet displays, there is obviously a lot of rumors back and forth about product delays and whether or not things are going to be delayed.

How back-end loaded do you think the increase in higher value panels will be during Q3? Or are you seeing it in the first part of Q3? Are you actually genuinely seeing the orders coming through now, or is it just an expectation at this stage?

[Usually], our shipment will be mostly loaded in second half of third quarter.

Yes, there's a lot of people out there saying, well, some of your major clients' products are delayed, and it could be more Q4 than Q3. Are you actually shipping -- are you seeing an increase in shipments right here and now in July? Or is it a hope that you will be seeing shipments? And it's not happening yet, but you're hoping it'll happen August and September.

Some product shipment is already start; some product is not yet. So most of the product shipment will be done in the middle of third quarter.

So when you're saying that the mixes will return to the similar mix that you had in Q1, is that a best case scenario? Or is there a meaningful downside to that guidance?

Actually, our third quarter mix should be similar to the first quarter, for Q1. Q1 is already reflecting our customers' order reduction, so our Q4 should be similar to Q4 last year.

Okay. Thank you.

Vivian Chan, AllianceBernstein.

Yes, I have a follow-up question on your outlook in second half. So do you think the peak season or peak quarter for this year will be in third quarter, or do you expect a seasonal pickup in fourth quarter? Do you think this year will follow a normal pattern in terms of seasonality?

Our total sales is very tough question, because we expect our peak period should be September, October and November. For now, it's very difficult to expect December -- usually December inventory correction -- level of inventory correction. Usually, Q4 is higher than third quarter. We still believe Q4 should be better than third quarter.

Okay. Thank you. That's my question.

Currently there are no participants with questions. (Operator Instructions). Ben Akrigg, F&C Asset Management.

When do you think you'll be in a position to ship oxide based displays or tablets?

Our tablets, we are in the development stages. For [smartphones, we will ship them].

Do you think it's likely the first half of next year or the second half of next year? For tablets, that is, sorry.

We cannot mention about it; please understand the precise time for that

I'm not asking about orders from your clients, it's just more in terms of your own capabilities. I mean, how long does the development phase take, perhaps? When would you be ready to supply?

Actually, product ready, the timing of the product ready will be determined by technology and the customer value. Actually, when you look at the technology side, we are ready. However, when you look at the oxide tablets, our cost increase should be meaningful. So the cost increase versus customer value; that's our decision point to start to the production, but that's not decided yet.

And when you say meaningful, is it 50% or 100% higher for a normal 10 inch panel, for example? What kind of magnitude of increase?

We can give you that kind of answer when we release the product. It's too early to mention about that now.

Okay. Thanks. Thank you.

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

Operator, if there's no participants for the questions, please end the Q&A session.

Yes, you may.

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