LG Display Co Ltd (LPL) 2013 Q3 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 fiscal year 2013 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 2013 third quarter earnings results by LG DISPLAY.

Welcome to LG DISPLAY third quarter conference call. My name is Hee Yeon Kim, Head of IR Department. I would like to welcome everyone to our 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 with the TV marketing department, and Sang-Gye Choi 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 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 highlight our Q3 results performance and Q4 outlook.

Moving on to revenue and profits on the next slide.

In third quarter, we have recorded a quarterly revenue at KRW6.6 trillion, similar to last quarter. TV set makers' inventory adjustment in the third quarter led to a larger than expected adjustment in the panel shipment and price decline throughout the quarter.

Despite the shipment and the price decline, we continued cost reduction efforts and increased the small and medium-sized panel shipments. Operating profit recorded KRW389 billion, 6% quarter-on-quarter improvement. Operating margin was 6% and EBITDA margin stood at 20%. Pre-tax profit was KRW403 billion, and net profit of KRW239 billion.

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

At the end of September year 2013, cash and cash equivalents decreased to KRW2.6 trillion, while liabilities declined by KRW388 billion. With the utilization ratio adjustment during the quarter end, the inventory remained at KRW2.4 trillion despite third quarter being our traditionally inventory stocking period.

Looking at our balance sheet, liabilities to equity ratio recorded 110%, a decline of 8 percentage points from the previous quarter. The current ratio remained at 113%. Net debt to equity ratio recorded 13% maintaining a stable rate.

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

Cash flow from operating activities resulted in cash inflow of KRW417 billion. Cash flow from investing activities resulted in an outflow of KRW711 billion. And cash flow from financing activities resulted in an outflow of KRW294 billion. As a result, the net change in cash was outflow of KRW326 billion with cash at end of quarter recording KRW2.6 trillion.

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

TV set customers inventory adjustment affected the panel shipment during the third quarter, and our shipment declined by 1% to 8.8 million square meters.

Although TV price decline continued throughout the quarter, ASP per square meter rose by 3% quarter on quarter to $678 thanks to increased shipment of small and medium-sized panels which has a larger -- higher ASP per square meter compared to the larger panels.

Moving on to our product mix on slide 7.

In third quarter, the TV segment was 44% of our revenue, monitors 20%, notebook 11%, tablet 10%, and mobile applications 15%.

The tablet and mobile segment portion rose thanks to shipment increase, while TV portion declined gradually due to relatively higher TV price decline during the quarter.

Moving on the slide 8 and looking at our capacity.

Our producible capacity declined by 3% quarter on quarter to 11.2 million square meters as our location to high resolution models increased.

Next, we turn to our outlook section.

Looking at Q4, we expect the shipments to increase by mid single-digit percentage and ASP declines to slow down going forward.

Considering the overall industry supply/demand situation and set makers' profitability, it seems difficult to expect the panel prices to rebound soon, but rate of decline is anticipated to slow down.

It is important to note that the industry cyclicality has been slow [too], meaning [less hope for big upside]. There's (inaudible), the level of price decline should be slowed going forward. This is our basic understanding.

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

Looking at overall supply/demand situation and recent slowed industry growth, it is a matter of [low value]. However, we aim to overcome the industry difficulties with continued product and cost differentiation.

For TV, while strengthening the infrastructure for OLED television, we will continue to maximize our profits for the LCD TV.

In terms of product lineups, we'll try -- TV lineup will be greatly expanded, as well as the increased focus on the order size and the cost competitiveness -- cost competitive models.

In terms of customers, enhancing collaboration with existing customers, while obtaining new [strategic] customers will be our key focus.

In terms of operations, achieving operational efficiency and cost competitiveness will be our top priority in conjunction with our business expansion.

For smartphones, product differentiation with LTPS based AH-IPS products, customer diversification and plastic OLED will be our key strategy going forward.

Next three years, investment plans are under review. We are trying to find an optimal balance between future preparation and financial stability. The investment for the future competitiveness, such as LTPS OLED, will be the continued focus, but the investment timing and execution steps are flexible depending on our industry environment.

This is our presentation for third quarter presentation, and I would really like 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). Nicolas Gaudois, UBS.

The first question would be on your expectations for capacity utilization rates in Q4. You seem to have indicated earlier today broadly the same utilization rate, but you have made, unlike your Taiwanese peers, some production reduction in September. So is this effectively assuming recovery of capacity utilization rates for large panels in the second half of the quarter? And if so, what is actually supporting this view?

And I've got two follow-ups. Thank you.

Overall, our utilization ratio should be similar as third quarter. Third quarter utilization ratio was [below] 90%, and in Q4 should be below 90%.

However, when you look at our month by month in detail, at the end of third quarter, we adjusted our utilization ratio significantly resulting in below 90% utilization ratio average in third quarter. So it means in Q4 in average, our utilization ratio is expected to be below 90%.

Okay. But mathematically, would imply some recovery in production starting November or mid-November, basically.

Actually, versus September, yes, our production will increase because of our inventory adjustment efforts during September. After stabilizing our inventory at a normal level, yes, we will increase our utilization ratio to below 90% from previous somewhere 80%.

Right, okay. Thanks. That's clear. On the opening profit side, you indicated down q over q in Q4. But assuming you have -- you do reach your mid-single digit area growth, you have ASPs probably up a bit of a mix, depreciation flat q over q. So is the decline coming basically from costs going up? And if so, could you help us a little bit in modeling COGS in Q4 and operating expenses?

Actually, in third quarter, price decline for TV was much higher than our expectations. We think this kind of price decline trend for TV will be done somewhere in Q4. So when it looks like a decline, or price decline, we think Q4 operating profit is likely to be lower than third quarter. That's [current] our assumption.

Okay. But that [omits] costs going up q over q as well, assumingly?

Yes. Actually, we are expecting blended ASP to offset the mix improvement in this. Cost is also increased due to the product mix improvement, driven by mobile and tablet increase.

Right. And last question is maybe to get your perspective on some of the recent industry chatter. So I think research came out saying a couple of days ago that they think there's about eight weeks of excess panel inventories and work in progress at Chinese TV makers. Overall, downstream inventories have come down post-October 1 holidays. What is your perspective on that and more broadly in terms of both work in progress and panel inventories of your TV customers beyond China as we get into Q4?

For China panel makers inventory situation, for now, we think we are not the relevant person to answer. The information for these kinds of competitors is very limited for us.

Anyway, why we think TV price decline should continue during this quarter, actually, as far as we understand, set makers' inventory situation has been recovered to the normal level thanks to the efforts of adjustment during Q3. However, there's some inventory -- still, there is some inventory for panel makers.

Okay. No, I think the comment was not on your competitors; the comment was on inventories at set makers in China of panels and work in progress of set makers in China basically.

Actually, as far as we understand, set makers' inventory looks fine. That's the third quarter issue, but now it is okay. But there is some inventories for panel makers.

Okay.

Instead of set makers.

Understood. Thank you very much.

Brian White, Cantor.

Yes. I'm wondering if you could talk a little bit about what you expect to grow sequentially in the fourth quarter in terms of product segments, and what you expect to decline in terms of product segment volume.

Our average, the area growth in Q3 is mid-single digit, so actually, large sized panel costs at TV and IT should be slightly -- should be similar or slightly lower than mid-single digit, but smart device shipment increases should be double digit.

Double-digit increase? Okay.

Increase.

Yes. And how do we think about the Golden Week in China? What is the sell-through numbers that you've seen so far for TVs?

We don't have a detailed number refers to the data, but we forecast the y-o-y growth rate for this Chinese national holiday is around minus 5%. But the result, the previous result is almost flat.

It depends on the research companies. Some research companies forecast a plus, and other research companies are slightly minus, so I think the average is almost flat. So 5% better than our forecast. This is okay.

Okay. I just want to be clear. Smart devices up double digits; is that 10%, or is that 40%? Can you just narrow it down a little bit?

Actually, it is more close to latter part.

It's closer to what?

It's more close to higher part, higher number.

The higher part. Okay. And finally, I didn't hear utilization comment. Can you just go through that again; what it was in third quarter, what it will be in fourth quarter?

Utilization ratio both for third quarter and fourth quarter will be low 90%. It is the same.

Okay. So you did not take down utilization in the third quarter?

Actually, our initial assumption for third quarter utilization ratio was mid to high 90%, but it was declined to low 90% due to abrupt adjustment in September. So now, we think mid-90% will be reasonable for Q4 numbers when you consider the additional inventory reduction at the end of this year.

Perfect. Thank you.

Ben Lu, Redtail Capital.

A few questions. One, can you talk a little bit about whether mobile margins will actually be better than the large panel margins in Q4, given the big increase that you're seeing in Q4?

In Q4, yes, our small size margins should be better than the bigger screen margin because bigger screens' price should continue to decline.

Okay, great. And then, Hee Yeon, earlier you said that there's still some excess panel inventory. Can you try to quantify how much and how long you think that will be digested? And along that front, if you think that there's still some excess panel inventory it sounds like from your competitors, wouldn't that continue to place pricing pressure on panels into Q4?

Actually, that's our assumption for the panel inventory. Actually, when you look at our situation, our inventory was recovered to the normal level thanks to our adjustment in September. However, we didn't hear about the reasonable utilization adjustment during third quarter. So we can reasonably guess inventory in the industry as a whole should be an issue in Q4, but the level of inventory would not be that high because some of the industry participants already adjusted.

Okay, great. And also, because we've seen pretty big panel price declines, can you talk a little bit about what you guys are doing on the cost reduction front?

For the past year or so, you guys benefited from the yen weakening, which obviously is good for glass procurement because you procure it in yen. But now that yen stopped depreciating in the past several months, can you talk a little bit about what you guys can do to further reduce costs?

Actually, even in this kind of situation, every quarter we did reduce our costs around low single digits every quarter. We hope that kind of level cost reduction will be done, even without any yen impact.

Okay. But if -- the low single digits that you've done in the past, how much of that came from a natural weakening of the yen? Because glass is, what, like 30%/40% of your costs? And naturally, you've got the yen weakening so that naturally reduces your costs without ever having to go back to the glass makers to get price concessions.

Actually, glass portion among our [bit of] material is not 30% to 40%, it's around 10% to 15%. So the impact from the yen is not that high. It is just minimum portion for us. In the past it was high, but nowadays, thanks to the continued price decline and what FX impact from the yen, the glass portion is just 10% to 15%.

Okay, great. Thank you.

Currently, there are no participants with questions. (Operator Instructions). Vivian Chen, AllianceBernstein.

I have a question regarding to CapEx and to depreciation, because I think your year-to-date CapEx is about KRW2.5 trillion. But I think your full-year guidance CapEx is about KRW4 trillion, so you are tracking behind your CapEx plan. So are we going to expect a pickup in the CapEx in fourth quarter? That's my first question.

Actually, our total CapEx for this year is slightly below KRW4 trillion, so the Q4 CapEx should be similar, or slightly higher quarters numbers, previous quarter numbers.

Okay. For your depreciation number, we start -- we see the depreciation drop in second quarter and third quarter. So can we expect that your depreciation number will continue to drop throughout the year and maybe in 2014 as well?

Actually, depreciation expense for Q4 and first quarter next year should be flat. And then we will have another drop in second quarter next year because our second gen [8] facility depreciation will be ended.

So will be flat for two quarters, and then further down in --?

Yes.

Second quarter 2014? Okay, I see. So do you have any thought in mind that -- about your CapEx plan for 2014?

Actually, it's too early to mention about that. However, we will be focused on the future preparations such as OLED and LTPS, while we are reducing CapEx for the LC side, except the China facility. It is likely our CapEx is to be lesser than this year.

Okay, I see. Okay, thank you.

Alex Lee, JPMorgan Asset Management.

We only have two questions, we promise. One question that we have is --

Thank you.

We promise, and it will be short. Could you explain for your Q3 sales, I'm looking at page -- the revenue product mix page, page 7, for the major products, I know you're reluctant to give a lot of color, but could you talk about how Q3 sales mix was from a customer perspective, whether it's LG Electronics or others, and how Q3 compared to, say, the first three quarters? Were there major changes or was it similar?

In terms of our customer mix, with two giant customers, LG Electronics and [AUS] customers, this is around 50% in third quarter.

Those two combined?

Those two combined.

Okay.

And then it will be a bit higher than 50% in Q4.

For those two combined?

Yes.

And let's say what about for monitor?

In case of monitors, we have [giant] three customers. Actually, Apple, Dell, HP and US customers are almost 60% together.

And no major change in third quarter versus year to date?

Yes, there's no major change.

Notebook?

We have four major customers, [Renova, Speedo] and US customers. They are all together around 70%.

And similar third quarter as --?

Yes, there is no major change.

Yes, okay. And we'll skip tablet.

And Alex has a question. Thanks, Alex.

My question is GP margin. When you see that your GP margin, the 50% is up Q2 and up y o y, but considering it's amid [risk response, big] ASP and lower utilization ratio, how could you do that? Could you please explain more detail for the improving GP margin?

Thank you.

Actually, there's a mixture of several issues. One is depreciation expense reduction. And second is continued cost from the material side. And also, our [LG] improvement for the new products such as mobile and tablet and TV side. That kind of three factors should be the major issue for our GP margin improvement.

So do you think you guys continuously improving the GP margins next quarter or 2014?

Next quarter, it should be [challengeable]. In 2014, we try to improve our GP margin further thanks to our continued products -- continued cost reduction and also the cost innovation product model.

Okay.

Thank you.

[Ben Lu], Redtail Capital.

I just have one follow-up question. When you said that utilization will be improving off the September lull, now can you break out between normal versus large size panel utilization?

Small size is almost full, and then larger size is around low 90%.

So will you be increasing large size utilization month over month as well, or is it primarily in the mobile small size?

Actually, in case of mobile, our utilization ratio should be flat quarter on quarter. In case of TV, quarter on quarter it should be flat. However, month on month, yes, it should be up.

Got it, okay. Thanks for the clarification.

Jerry Tsai, HSBC Global Research.

Just a few quick questions. First of all, what is your utilization in the second quarter, just as a reminder?

Second quarter was same at low 90%.

Okay, so there's no change. Okay, great.

My next question is your per square meter ASP went up by 3% in the third quarter, and I was just wondering if you take out the small size display, what would be the trend on a q-on-q basis.

Taking out the small size impact, there should be decline because apple to apple price decline was higher.

Sure. Would you say the price decline is 5% or higher or lower?

In every -- actually, our TV panel price decline ratio is similar as market price trend. In other words, it's around mid-single digit.

Average -- sorry. You mean the average for TV or average for the large size panel?

Average for TV.

Average for TV was down 5%?

Yes.

Okay, great. And my last question is can you update us with the size migration of TV you have seen so far in third quarter? And maybe in the coming quarter, do you expect then the average size to continue to go up?

The industry size or our Company?

Well, both, if you have it, sir.

Actually, I don't have industry average size, but our Company second half, Q3 and Q4 are almost the same. And then the first half -- second half is 0.5 inches higher than first half. So every year from year 2012, 2011, 2012, 2013, I think, are 1 inch continuously bigger than previous year.

So the annual increase is about 1 inch?

Yes. And we hope again in next year.

Okay.

And as I know, our average size up around 1 inch and 1.5 inch bigger than industry average.

Oh, I see. Okay. Thank you very much.

Dongwon Kim, Hyundai Securities.

I have two questions. The first question is about new customer segment for smartphone panels. During the Korean version of the conference, the CFO, Mr. Jung, mentioned that one of the priorities for the next year is to gain new customers, especially in the mobile market. So can you give us any color of those new customers? Does that mean you can expand your mobile panel sales to China's customers? Then there's another follow-up question.

We are trying to focus on the Chinese customers, and also one in Japan company. So anyhow we try to expand our business in terms of smartphone.

Thank you. And my second question is about the average size increasable for the TV panel next year. As the CFO mentioned, there will be more shipments of UHD TV, and as far as I know, most of the UHD TV size are much larger than the existing LED [full HD] TV. So you just mentioned that 1 inch increase for the next year, but I think there will be more for the size increase for the next year. And could you comment on that?

It's panel size mix, right? And we focus on big screen size of 55 [inches] and above. But currently, we think of 1 inch because of life-size growth rate is already mature so it's nice to increase jobs. So we think 1 inch is also big gap in the future.

So I think 1 inch is a [big thing] for us. It depends. Maybe 2 inches is possible, but I think a 1 inch is a reasonable number. But if we possible, we want to increase our average size bigger than 1 inch.

Okay. Thank you.

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

There is no participants with a question, so we think it's better to end this Q&A session. So we will end the Q&A session.

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

Thank you.