LG Display Co Ltd (LPL) 2014 Q1 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 2014 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 2014 first quarter earnings results by LG Display.

Welcome to LG Display's first quarter year 2014 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 and market intelligence. [Matthew Kim] is Head of TV Marketing; and [Tu Jung Ko], Head of Market Intelligence 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 to highlight our first quarter results performance and second quarter outlook.

Moving on to revenue and profits on the next slide.

[Positionment] and price came out in line with our original guidance. With the weak seasonal demand, the area (inaudible) decreased by 13% quarter on quarter. We have witnessed ongoing price decline in the beginning part of Q1, but the degree of price decline [operated soon] and ended with [over-stabilized] pricing at the end of Q1.

Due to the (inaudible) and ASP change in first quarter, we recorded a quarterly revenue of KRW5.6 trillion, down 21% quarter on quarter.

Despite (inaudible) decline, we managed to [revert] in an operating profit of KRW94 billion by improving product mix with larger size of panel shipments, and actively reducing cost with the utmost effort.

Operating margin was 2% and EBITDA margin stood at 18%. Pre-tax profit was KRW29 billion and net loss was KRW82 billion. Net income was greatly reduced due to divestment of the deferred tax assets.

In conjunction with the [early] investments, investment tax credit occurs and our accounting (inaudible) tax assets. This year, the minimum tax rate has risen from [16%] to 70% -- 17%, and according to the rate change, that 1% adjustment to the remaining deferred tax assets has been reflected at one time.

For your reference, last year, our government rate, the minimum tax raised by 2 percentage points, resulting in about KRW200 billion [DTA] adjustment.

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

Total asset was KRW21.6 trillion, liability KTW10.9 trillion, and equity KRW10.8 trillion. Cash and cash equivalents decreased by [KRW302 billion] resulting in KRW2 trillion. Inventory recorded on manageable level as KRW2.2 trillion.

Looking at our balance sheet, liability to equity ratio recorded 102%, current ratio was 94%, net debt to equity ratio recorded 16% maintaining a stable rate.

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

Cash at the beginning of the last quarter was KRW2.3 trillion. Cash flow from operating activities resulting in cash inflow of KRW915 billion. Cash flow from investing activities resulted in an outflow of KRW1.1 trillion, and cash flow from financing activities resulted in an outflow of KRW173 billion. As a result, the net change in cash was an outflow of KRW303 billion resulting in cash [recording KRW2 trillion].

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

During Q1, our shipments declined by 13% resulting in [8.3 million square meters]. ASP on [equity at per basis] fell by mid single-digits percentage quarter on quarter, and some IT and TV panel prices have been stabilized since the end of the quarter.

But due to relatively steeper shipments decline in smaller size applications which has higher ASP per square meter than the larger panels, our blended ASP per square meter declined by 10% quarter on quarter to $628.

Moving on to our product mix on slide 6 (sic - see slide 7, "Product Mix").

Our TV business was 41% of our revenues followed by monitors 20%, mobile 17%, notebook 12%, tablet 10%. All the applications except tablet showed increased portion, while the tablet segment portion declined during Q1 due to the seasonal decline and [high base] impact from previous quarters as the demand of tablets was highly concentrated in Q4 last year.

Moving on to slide 8 and looking at our capacity.

Our producible capacity in Q1 declined by 4% quarter on quarter to 10.7 million square meters and it was mainly due to the allocation for R&D activities and LTPS facility conversion.

Next, we turn to our outlook section.

For the second quarter, we anticipated shipments to increase by low teens percentages, as set makers are preparing for the new product lineup. With a strong demand of ultra-high definition TV and larger size TVs, area growth is expected to increase meaningfully compared to the unit growth.

Considering the overall industry supply, demand and inventory situation, panel price is anticipated to stabilize across the board, with some products expecting larger price increase. Depending on supply/demand situation, [we're remaining] our utilization rates at a similar level as Q1 in order to provide the area base shipment increase in second quarter.

In terms of profit, there are positive points such as an uplift in [shipments] with the stabilization of panel price. However, we need to consider recent FX trend and the preparation expense of China facility.

As the LCD industry has entered a slow growth pace, we are committed to solidifying our profitability by continually increasing the differentiated products such as OLED TV, ultra-high definition TV, IPS monitors, high-resolution products based on LTPS, and classic OLED products. We will continue to drive our cost differentiation as well to overcome the industry difficulties.

We are trying to find an optimal balance between future preparation and financial stability. Going forward, we will convert existing LCD lines for LTPS and OLED production in [stages] rather than building new fabs in order to maximize our CapEx efficiency. As explained, we'll do our very best continually to create additional value for our customers and shareholders.

Thank you.

This ends our presentation for Q1 and I would be delighted to take your questions. To use the time efficiently, please limit to two questions per person. Operator, please proceed with the Q&A session.

(Operator Instructions). Nicolas Gaudois, Cantor Fitzgerald.

I haven't changed firms. I still work at UBS. Just first question, I guess, in terms of a clarification on capacity overall in Q2. Should we look at stable capacity or maybe a bit of increase driven by the Guangzho in China?

And my follow-up question would be on the TV panel market near-term outlook. We've seen prices increasing for 32-inch and 40-inch as well. We haven't seen price increasing for the larger sizes. So I wanted to get your insight in terms of the dynamics there which explain the discrepancy.

Perhaps what comes to mind is actually capacity allocation to larger sizes including, of course, 4K being a factor, and also potentially, some of the restocking of near term being more smaller sizes, and I would be very keen to get your view on that.

Thank you.

For your question capacity in second quarter, we are expecting [a mild] increase for the capacity because of our [max cap] and [min loss] activity. And also, we have to reflect that some capacity increases are driven by China facility as well. But the level of capacity increases should be very mild at around low single-digit percentage.

Great.

Okay. Demand and supply for the TV; first of all, the demand side. There is some issue for the increasing of the demand, first of all, the events of the World Cup; set makers [holding] the demand. And also, the UHDTV demand is increasing very sharply. That means that, as you know, this channel needed some inventory for the [pipe running] to meet the increase of demand, and also the larger size.

UHDTV also is [stimulated] for the larger size. And then also, the prices very sharply dropped in the last quarter, so that means the [stimulation] of the value side. That's why the volume is a bit limited increasing. But area basis is hardly increasing I believe.

And also, the supply side, as mentioned with Miss Kim, the limitation of the new fabs, so the supply and demand is [quite] very healthy as well, at least in the second quarter. But we don't know how the second half -- [we need to check about] the retail sales.

Okay. Thank you very much.

Brian White, Cantor Fitzgerald.

I'm wondering if you could talk about why tablets fell 60% quarter on quarter in the March quarter.

There are several reasons. One is the seasonality. As I mentioned, our [Q2] shipment was concentrated in Q4 thanks to the strong seasonality. And also, second reason is our market share is normalizing nowadays. As you already understand, the last year, our market share in our customer side was very high, but it is expected to normalize. That's another reason.

Okay. And when we think about the [June] quarter, your volume outlet looks fairly strong. What are the two or three drivers of that strong volume outlook for the June quarter? Is it TV? Is it the mobile,? Is it capital coming back? What's driving that outlook?

Actually, our volume outlook is not as strong [as area] growth. In terms of volume growth, it is expected to be mid single digit percentages [growth]. However, as Matthew commented, bigger size screen demand is -- [ratio of] TV is [highly] increasing nowadays. That makes us to increase our average shipment growth in second quarter potentially while our unit shipment growth is only mid single digit.

Okay. And finally, could you talk a little bit about expectations for 4K TV as a percentage of your shipments this year? And could you talk a little bit about what you're seeing in the curved TV market? Are you starting to ship the curved panels?

Okay. So now our 4K shipment is very softly increasing, so this year, we expect it to the high single percentage of our volume. And also, we ready to [order] some curved products, but just we are watching for the -- we have support for our set makers but we don't know how much the impact of the market for the curved TV. So we already prepared all things so we have some model, but this just watching.

A little difficult to hear you. Did you start shipping curved or you will start to ship it in the future?

It might be the third quarter will be shipments -- will be shipped.

Thanks.

[Mark Smith, Accor Securities].

Could you talk about the present yields at your Gen 8 OLED fab? And also, when you do hit maturity, do you expect to be able to compete in the mid-tier television market, or will you need to be able to eventually print OLEDs?

For yield size, we cannot tell the numbers directly unfortunately. However, all the yield trend is in line with our assumptions. So that's why we made a decision to start enter production in second half. The second half enter production will be done based on our original schedule.

Okay.

And then you were -- second question, please. I don't understand --

The second question was regarding your WRGB manufacturing method with the [product position]. Do you expect to be able to compete in the mid-tier television market, or will it remain only a premium television even when you hit commercial mature yields?

If my understanding would be correct, our OLED strategy is targeting high-end market instead of mid-end market. But if we are very successful to reduce our cost level to the LCD equivalently, we can do target mid-end market finally. But that's the matter of time. In early stage, we will target high-end market, and then we will enter into the mass market.

Okay. Thank you very much.

Andrew Abrams, JG Capital.

A question on cost down. Can you give a breakdown of your cost down for the first quarter and in terms of materials and production? And can you give us an idea what you think it's going to be for second quarter?

Actually, it's very tough to mention in materials. Anyway, the biggest reason for our cost reduction comes from the material cost reduction together with the overhead cost reduction. That's the main reason our -- main reason for our cost of goods sold -- stabilized cost of goods sold despite of our sales contraction in first quarter.

And then in case of depreciation expense, it was increased because our depreciation expense increased by about KRW50 billion in Q1 sequentially.

So what was the total cost down for the first quarter?

Yes. Our total costs too and also the area cost too should be decreasing first quarter.

Okay. By how much would you have thought it would come down? It's usually around 2%.

2%? No. It's much higher than 2%.

Okay. So it's higher than 2%. Can you speak a little bit about what you said about converting other facilities to OLED; what the progress is as far as that's concerned and what the status is of the production facility that you're now producing OLED TVs? And would you expect to have an OLED smartphone product panel out at some point during this year?

Your question might be two questions. One is for TV and second is for really the mobile phone.

For TV, as I mentioned before, our production is in line with our original schedule. So now we are providing a limited volume scale comes from our first phase OLED facility for TV. And then at the end of this year, we will provide the second phase production for OLED that's [end] to facility.

And to do or enter production, our yearly increment will be a key issue. And also, as I mentioned before, our yearly increment [speed] is in line with our original schedule. So all issues are okay for TV production.

In case of the mobile phone, we already released OLED flexible mobile phone together with LG Electronics. That's G Flex. And then we will expand our product lineup going forward.

And are those mobile phones done in the same facility that you're doing TVs, or are they in a separate facility?

Facilities are separate; technologies are also separate.

Right. Thank you.

Jeffrey Toder, CIMB.

First, a question on your shipment guidance. You said that your utilization rate would be flat q on q. Your area shipments are up about low double digit. And you said your capacity would be up mid single digits. So there's another 5% of area growth in there. Is that coming from a reduction in inventories which went up a little bit q on q?

Yes, that's correct.

Okay. And just to confirm your utilization rate is around 90% in the first quarter.

High 90%.

Excuse me?

High 90%.

High 90%?

Yes. Slightly below 100%.

Oh, slightly. So it was around 100%. So you're full?

Yes.

Okay. And then my second question is just looking back at the first quarter margin. Obviously, things came down quite a lot, but your numbers were better than the Street forecast. There was a decline in what we would consider to be higher-margin products, tablets and smartphones, but your numbers still exceeded expectations. Can you talk a little bit about what might have contributed to that?

Actually, our high-margin product comes from the bigger screen size TV and monitors, ironically. And in case of mobile and tablet, margin was lower than that TV and [IPS] monitors. Our (inaudible) contributors such as the bigger screen TV or (inaudible) in 3D TV and together with IPS monitor, that kind of proportion increase contributed our (inaudible) margin in Q1. This kind of situation will also be impacted in second quarter as well.

So that means you expect your margins to be going up in second quarter?

We hope so.

Okay, great. Thank you very much.

[Mark Tun, Mutsubishi UFJ Morgan Stanley].

Just one question for me today. I'm wanting to find out a little bit more on the downward pressure for your ASP. I see on slide 6 the ASP has gone down $770 to $628. Can you give us a little bit more of a macro view on maybe the increased competitiveness of some of the Chinese manufacturers or other reasons for this decrease in ASP?

Just one question from me. Thank you.

Well, blended ASP declined 10% in first quarter. That mainly comes from the product mix. In case of smaller size, ASP per square meter is much higher than the bigger screens. So if you look at our sales mix in our presentation material, actually, our smaller size sales contribution decreased significantly in first quarter. That's the main reason.

So blended ASP going forward, we believe -- we don't expect this kind of sharp decline in terms of blended ASP in second quarter. In second quarter, although mix structure should be similar, but the ASP, apple-to-apple ASP increase in some segments, together with better product mix even in the commodity side.

Is that enough for your question?

Okay. That will do. Thank you very much.

Currently, there are no participants with questions. (Operator Instructions). [Clare Kim, Hemda Securities].

I have two questions on UHDTV. You have already mentioned that the UHDTV shipment proportion for this year would be high single percent. And could you provide the proportion, not in terms of shipments, but in terms of area?

And there will be another follow-up.

Area portion is higher than the volume portion. Might be, [teen] -- around this is 10%; something over 10%.

Thank you. And my second question is about your price forecast for UHDTV, and as far as I know, for the last March and April, the UHDTV panel prices are still declining. And as you mentioned, your outlook for the blended ASP for Q2 will be very stabilizing, but do you expect that the panel price for UHDTV is still declining for Q2 but it is still profitable because of the price premium between UHDTV and (inaudible) TV of the same size? Am I correct?

Yes.

Yes, you are correct.

Thank you.

Currently there are no participants with questions. (Operator Instructions). Andrew Abrams, JG Capital.

Just a quick follow-up on that last question. If I remember correctly, you were looking for a 30% premium on UHD sets for the current year. Based on what we've seen in terms of price declines, are you still comfortable with that 30% premium for the year, or would you expect the overall premium to decline from that 30% to a lower number?

As you know, the market price is depend on the market situation. If the UHD market is very strong, we can keep the panels delivered. But as you know, the market is very high, and also there's a premium market, so everybody wants to compete that market. So actually, basically, it is difficult to keep that kind of the premium. A little bit slowdown because we can also reduce the cost, so we can [build] the marginal compared to the full HD.

Thank you.

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

We have one correction for your questions. Actually, related to the high depreciation portion, that is expected to be high single digit. As it comes from the area [percentages], it is expected to cross 20% instead of 10%, over 10%.

Christine Han, Arete Research.

First one is, sorry, housekeeping matter. You mentioned depreciation was up by about KRW50 billion this year, or this quarter. Can you, sorry, explain to me again what was driving this and how should we think about it going forward?

[You can, yes]. Because of the (technical difficulty) look at the depreciation expense trend?

Yes, correct. Why was it up KRW50 billion this quarter and how should we think about it going forward this year?

Okay. The first quarter, that's because of the [ATPS] conversion. Actually, our [ATPS facility is charged as] production so we have to deflect our depreciating expense in first quarter.

And then the trend. Going forward in second quarter and third quarter, our depreciation expense decline a bit and then come back to the Q4 last year level in Q4 this year because of our enter production schedule with the China facility production. So all in all, our depreciation expense is expected to decline from KRW3.8 trillion to mid KRW3 trillion this year.

Thank you. And my second question is, could you share with us a little bit more color around your CapEx guidance this year? Are you guys remaining the same as what you guided before, or has there been any change?

Our guidance is mid KRW3 trillion. This is slightly low; slightly lower than last year.

Sorry. Last year, our CapEx was KRW3.5 trillion, and this year it is expected to be a similar trend.

Great. Thanks.

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

Operator, if there is no question, we will end the conference call now.

Yes, you may.

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

Thank you.