LG Display Co Ltd (LPL) 2013 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 2013 first 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 first quarter earnings results by LG Display.

Welcome to LG Display first quarter year 2013 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 IT, TV and IT marketing, and market intelligence. [Matthew Kim] is heading up the TV marketing; [Stephen Go] marketing services 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 the Korean K-IFRS accounting standards and are unaudited.

Next slide, please.

This conference call will take about an hour. Before we go into the Q&A session, please allow me to highlight our Q4 results performance and Q1 outlook. Also, I will briefly talk about our strategic direction.

Moving on to the revenue and profits on the next slide.

In Q4, we have recorded a quarterly revenue of KRW7.1 trillion, an increase of 8% quarter on quarter. With end of China subsidies at the second half of year 2013, we initially had a conservative view on TV orders. However, thanks to the seasonal demand pickup and increased demand for larger size TVs in addition to the small and medium sized product seasonal demand pickup, the area shipments recorded a higher single digit quarter on quarter increase compared to the initial guidance of mid-single digit.

Despite the increase in shipments and revenue, continued TV price decline from the third quarter, and negative FX rate impact affected the margins. Operating income and EBITDA for the quarter declined to KRW257 billion, and KRW1.1 trillion respectively. Operating margin was 4%, and EBITDA margin stood at 16%.

Pre-tax profit KR225 billion, and net profit of KRW71 billion. Net profit, compared to the pre-tax profit was greatly reduced due to the adjustment of deferred tax assets.

In conjunction with yearly CapEx, investment tax credit occurs and are accounted as deferred tax assets. These deferred tax assets are reviewed regularly on its feasibility and adjusted accordingly. This year, the minimum corporate tax rate has risen from 14% to 16%, and according to the rate change, adjustment to the deferred tax asset has been reflected.

Moving on to slide where we're looking at our financial positions and ratios.

At the end of December year 2013, total assets was KRW21.7 trillion, liability KRW10.9 trillion, and equity KRW10.8 trillion. Cash and cash equivalents decreased by KRW324 billion to KRW2.3 trillion.

Despite the increase in the utilization rate, higher panel shipment and [active] inventory control in preparation for the low season has reduced the inventory amount to KRW1.9 trillion, the lowest [over] the last three years, and 20% quarter-on-quarter decline.

Looking at our financial ratios, liability to equity ratio recorded 101%; the current ratio at 114%. Net debt to equity ratio recorded 15%, maintaining at a stable level.

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

Cash flow from operating activities resulted in cash inflow of KRW592 billion. Cash flow from investing activities resulted in an outflow of KRW924 billion. As a result, the net change in cash was outflow of KRW323 billion, with cash at end of quarter recording KRW2.3 trillion.

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

Seasonal demand pickup larger size TV demand, in addition to effects of small and medium size new model launches from customers, have helped the first quarter of area shipments to increase by 9% quarter on quarter to 9.6 million square meters. Although individual product price declined, ASP per square meter rose by 3% quarter on quarter to $697, thanks to increased shipments of small and medium size panels which has higher ASP per square meter compared to the larger panels.

Moving on to our product mix on slide 7.

In Q4, TV business was 37% of our revenues, monitors 17%, notebook 11%, tablet 20%, and mobile applications 15%. While division and area has increased relatively, [rather] price decline compared to the other product categories has related to the decline in the sales portion.

On the other hand, tablets had a significant increase of sales portion due to a sharp increase in shipments, and also product and average size increased.

In mobile, despite a double-digit shipment growth, sales portion has remained flat QoQ as tablet sales increase [effectively] has been relatively higher. The sales portion of mobile and tablet will remain over 30% in first quarter.

Moving on to slide 8 and looking at our capacity.

Our producible capacity remained at a similar level to Q3, recording 11.1 million square meters. As is seen in the chart, our producible capacity has been decreasing slightly quarter on quarter since the year -- since the second quarter year 2013 due to factors such as fab conversion.

The first quarter capacity is likely to show a single digit decline with the [active] fab conversion and etc.

Now we turn to our outlook section.

Looking at Q1, we expect the shipments to decline by low to mid-teen digits percentage, and ASP to decline to slowdown. We expect a traditional seasonal decline in all of the product categories. However, the small and medium-sized products are expected to show milder seasonality compared to year 2013 due to customer diversification.

Considering the overall industry supply/demand inventory situation, as well as panel makers' financial situations, we expect the decline in payment price to gradually slow down.

This ends our presentation for Q4, and I would like -- I would be glad to take your questions. To use 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.

So first one will be if you could elaborate a little bit, please, on your capacity ramp plans for the China fab in Guangzhou. You said, I think, that production will start middle of the year. How should we think about the progression in terms of (inaudible) per month into the second half of the year, please? And within that, if you could elaborate of the CapEx implications of that and the TPS in total.

Thank you.

First question; your first question related to China facility ramp up. Yes, we expect the China fab to ramp up in the middle of this year as we have planned. The capacity ramp-up speed will be flexible depending on the market demand situation, especially driven by a larger sized TV demand.

And in terms of our CapEx, if you look at our financial statement, our CapEx for last year, that was KRW3.5 trillion. We expect this year CapEx should be similar level of last year, and the CapEx portion is expected to be around 30% for the China facility. The remaining 70% will be focused on the OLED and [LG peers].

Great. Thanks. And just following up on that, depreciation I think you said will come down KRW500 billion, so just to clarify, which will bring you down ex amortization to just about KRW3.1 trillion for the year. And how should we look at this on a quarterly basis, please?

Thank you.

Our depreciation expense for last year, that was KRW3.8 trillion, and also it is expected to decline slight over KRW3 trillion. That's driven by our second eight generation fabs depreciation stopping.

And then if we look at the depreciating expense trend every quarter, in first quarter, our depreciation expense is expected to grow slightly, and then it will decline to be slightly below KRW1.8 trillion [later]; and then altogether it might be slightly over KRW3 trillion.

Okay. So the KRW3.8 trillion was depreciation plus amortization, right, for last year?

Yes.

Okay, perfect. Thank you very much.

Ben Lu, Redtail Capital.

I just have two questions. Kim, can you clarify what you said earlier that mobile shipment was flat in Q4?

Sorry, Ben. We cannot follow you. There are lots of noises.

Sorry. Is this better?

It's better.

Hello. Can you hear me?

Yes.

Sorry. Can you clarify --?

Can you tell me again?

Sorry. Can you clarify a little bit earlier about what you said about mobile shipments being flat in Q4? Did I hear you correctly?

Actually, mobile shipment in Q4, that was double-digit growth sequentially. However, our revenue mix was flattish. That's the reason why you asked us.

Actually, the other divisions, the shipments increased over -- size increase [intake] was higher. That's the main reason because although the shipment growth for mobile was double digit, but it looks just like this in terms of revenue mix.

Is that correct for your answer?

I'm sorry. This is the operator. But Mr. Ben Lu's phone was taken off.

Next question, please.

[David Smith, Bernstein Research].

Could you talk about your progress on OLED television yields, as well as the timing and capacity of your M2 OLED fab?

Our progress of OLED television is expected to our initial planning in terms of ramp-up schedule and yield improvements. Actually, our second phase facility for OLED is expected to ramp up second half of this year.

But the --

Even [in the] projected capacity?

Capacity. In terms of evaporation capacity, it's already fixed at [20,000] per month. However, oxide facility is not decided yet because it is highly related to the LCD TV demand.

Anyway, some part of -- some portion from [26,000] will be ramped up this year, and the remaining will be ramped up next year. Altogether, 26,000 will be fully ramped up until next year.

Thank you. Also one follow-up question. I was wondering if you had met your capacity plans on the flexible OLED side. Have you made any decisions on there?

Flexible OLED side, right now, we have a [6,000] per month facility based on gen point -- 4.5 generation. We will expand our facility a similar level at the end of this year. However, it's not fixed yet. This kind of CapEx is also depending on the -- our customers' commitment and the market demand situation.

Thank you very much.

Jeffrey Toder, CIMB.

I wonder if you could talk maybe about your view on ASPs in first quarter on a like-for-like basis as opposed to a blended basis.

Our ASP guidance is that ASP trend to stabilize going forward, when you look at the inventory situation from our side and set makers, together with the financial status from our competitors' side. Individual price trend will also be stabilized.

Okay. And does that --?

In terms of the blended ASP, our blended ASP is heavily impacted from product mix. In first quarter, small-size mix should decrease slightly because of that our blended ASP should decline.

Okay. So small and medium size will decline as a percentage of the total. Is that correct?

Yes.

Okay, great. Can we just go back to the depreciation numbers that you gave? I didn't catch the quarterly trend. And also, how does the ramp up of the OLED fab affect depreciation in the second half of the year?

Our depreciation expense in Q4 should be similar to the level of third quarter last year. That's around -- that's almost to KRW900 billion. And then this amount should decline every quarter, and then it will come back to the KRW850 billion in Q4. So altogether, the depreciation expense is expected to be KRW3.3 trillion this year.

KRW3.3 trillion?

Yes.

Okay, great. Thank you. And I wonder if you can talk about your plans for UHD for 2014.

Ultra TV demand?

Ultra high definition, yes.

Yes. Ultra high definition demand is expected to be around mid-single digit, based on the market demand. And also, our target shipment is expected to be similar trend of market, or higher. That will totally depend on the market acceptance of our product portfolio, together with the set makers' price strategy.

Okay. So you would expect UHD to be mid-single digit percentage of your TV panel shipments?

That's the market expectation, and our portion should be in the range from mid-single digit to high-single digit.

Okay. So it should be mid to single, high to single digits of your unit shipments?

Yes.

Okay. Thank you very much.

(Operator Instructions). Brian White, Cantor Fitzgerald.

I'm wondering if you could talk a little bit about expectations for the Chinese New Year in terms of growth, and also talk about inventory levels of televisions for the Chinese New Year, going into the Chinese New Year.

Actually, you know that is last year, in 2013, is -- there was some Chinese Government subsidy programs. So those programs is stimulating the TV demand in the first half, but unfortunately, those subsidized programs was then [shut] down by -- in the first half of -- end of first half. Those then impacted -- that's why that this [first]-half demand is a little bit declining. Mid-single digit is could be in the declining YoY.

Also then, considering fourth quarter and China TV sales [indices] is quite good, so we think that it's the set makers and the channel side and the inventory levels that could be healthy at the moment.

Okay. So I just want to be clear, so for Chinese New Year, you think mid-single-digit decline in units year over year for the Chinese New Year? Is that correct?

Yes, will be. Yes, could be.

Okay. And I wasn't clear. Tablets, your tablet business did very well in the fourth quarter. It looks like it doubled, more than doubled. How do we think about tablets in the March quarter? What is the percentage decline quarter on quarter in the first quarter?

Because of the [basic] impact Q4, our specific segmentation shipment decline should be higher. Actually, our shipment guidance for [average], that was low to mid-teens decline. But in case of tablets, the shipment decline should be higher than our average decline guidance.

And I'm looking last year. In the first quarter of 2013, it looks like tablets fell about 36%. Is that how we should think about the first quarter of 2014; similar to the last year decline?

First quarter this year, seasonal pattern should be better than last year.

Okay, better. Okay. And utilization -- loading rate, finally; loading rate. What's the loading rate -- what was the loading rate in fourth quarter and what do you expect in the first quarter?

In Q4, our loading rate was the high 90%. And actually, as we already mentioned, our capacity will drop at around mid-single digit percentage because of fab conversion issue. If we compare with the similar capacity of last year, our loading rate will decline to low to mid-90%.

Okay. And you talked about this deferred I guess tax asset impact in the fourth quarter. How large was that? What was the impact to your net income from the deferred tax asset?

If we take the gap between recurring, deferred asset impact is KRW135 billion.

Okay. And finally, I don't see the detailed -- I see your presentation but not the detailed financials that you typically provide. Are those on the website, or are they going to be posted to the website?

Detailed financials?

The detailed financials.

Our detailed financials, yes. That's -- yes.

Yes, they're there? Or, yes, they're going to be posted.

It is already posted.

Okay. We'll look harder. Thanks.

Nicolas Gaudois, UBS.

Just a very quick follow-up. On the LTPS side, obviously, we know what capacity you have for Gen 6 year end. Could you maybe perhaps elaborate a little bit on the production levels, so effectively [production] rates there?

And how you've been addressing, I guess, the two key issues insofar for LTPS manufacturing; i.e., the static electricity for the cell production process. And I suspect, so some of the issues in terms of the [laser-emitting] process that has now been appearing for, especially for Gen 6. So if you could talk a little bit about that and how production has been [settling] so far into your capacity ramp.

Thank you.

Your question is our Gen 6 LTPS conversion progress. Is that right?

Not the conversion. It's more about the actual production versus the conversion. So what kind of production are you achieving? And commenting qualitatively on how LG Display has been working to address two of the key issues that the industry is facing typically for LTPS process, which is number one, static electricity on the cell production process; and number two, how you think your laser-emitting process maturing, since of course this is a novelty for that process.

Thank you.

From the production side, as you already understand, we already have 40,000 LTPS facility. Among them, 30,000 was already ramped up, and the remaining 10,000 will be ramped up summer this year. And then we also have another plan to ramp up another [20,000] at the end of this year or early next year. That's the production schedule. This is mostly committed from our diversified customer base.

And then --

(Multiple speakers), sorry. Not capacity but production.

Yes, that's the production schedule.

Okay.

What I'm trying to say is our capacity is highly related to the customers' commitments from the diversified customer base.

And then your second question, we cannot follow you.

Okay. I'll take that one off line. It's probably a bit complicated, but it was related to some of the --

Yes, that's (multiple speakers).

Some of the process challenges that typically you see in LTPS. So let's do this another time.

Thank you.

So if you send the email, the detailed questions, we will get back to you on them. However, anyway, in the LTPS process, we don't have any issue, so production process is quite okay.

Perfect. Thank you very much.

Miss Vivian Chen, AllianceBernstein.

I have a question regarding to your product mix. So we see a pickup of tablet revenue in fourth quarter. But if we look at the full-year revenue, so from the mobile it's around 13%, and the tablet is also around 13%. So if we look back 12 months from now, if we look the whole year of 2014, do you expect the revenue contribution from tablet and mobile will increase this year? Or any comment?

Yes, definitely, we expect mobile and tablet business to grow in terms of sales mix.

So do you have any target? For instance, like the combined sales of mobile and tablet should reach, I don't know, 30%? I'm just asking if there's a target.

Actually, in year 2013, is around the slide over mid 20%. But anyway, we are expecting that should be over 30%.

I see. So how are you going to achieve this target? Are you --? Do you increase your customer base, or are you gaining share with existing customers? How are you going to reach this target?

Actually, we already showed the feasibility actually in terms of mobile, which is we already diversified our customer base such as LG Electronics or Chinese handset makers. Also handset and tablet market trend is bigger screen. So this kind of bigger screen demand gives us a chance to increase our ASP.

So customer base diversification, together with ASP increase, supported by bigger screen demand gives us a chance to meet that kind of target.

Okay. Thank you. And also another question regarding to pricing. So last year, the industry has been pretty tough, because the LCD, certainly large panel TV pricing was pretty weak. So compared to last year, do you have any comment on the pricing environment for TV, and also for smaller size, like mobile and tablet?

Okay. I'll talk to you about TV pricing. Right now, there's [two] seasonality. This first half little bit going down actually, but from the second half would be quite stable, I think.

In case of small-size business, as you already know, this is customizing business. It is not that reflected by market price trend. So price trend will not that be different from last year trend.

Okay. Thank you.

Currently there are no participants with questions. (Operator Instructions). Until we have any participant with a question, we will wait for a second.

Operator, if there is no questions, we will end our conference call now.

On behalf of LG Display, we thank you for participating in our Q4 earnings conference call. Should you have further questions, please contact either myself or my colleagues.

Thank you.