LG Display Co Ltd (LPL) 2014 Q2 法說會逐字稿

Good morning and good evening. First of all thank you all for joining this conference call. Now we'll begin the conference of the fiscal year 2014, second quarter earnings results by LG Display. This conference will start with a presentation followed by a (inaudible) Q&A session. (Operator instructions). Now we shall commence the presentation on the fiscal year 2014, second quarter earnings results by LG Display.

Welcome to LG Display, second quarter year 2014 conference call. My name is Heeyeon 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 Market Intelligence and TV Marketing. (Inaudible) is Head of Market Intelligence Department and Daniel Lee is leader of the TV Marketing team. 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 Korean IFRS accounting standards and are un-audited. Next slide please.

We have approximately one hour for this conference call. During the first part of the call I would like to highlight our second quarter results performance and third quarter outlook which corresponds to the slides available on our website. Afterwards we will take your questions. Please do not hesitate to contact us after the call if you have further questions.

Moving on to revenue and profits on the next slide. In the second quarter shipment and pricing came out in line with our original guidance. The area panel shipment increased by 12% quarter-on-quarter. Due to the shipment increase, especially driven by growth in larger sized panels and ultra-high definition TVs along with favorable pricing conditions, we have recorded the quarterly revenue at KRW6 trillion, increased by 7% quarter-on-quarter.

Shipment increase and positive pricing trend was a positive impact on the operating profit side. However, the recent sharp appreciation of the Korean currency against the US dollar and China fab preparation expense was a negative factor for the earnings. Especially Korean won appreciation of more than KRW40 during the quarter resulted in a minus impact of more than KRW100 billion in the operating profit side. Despite of the trends in won in second quarter, we were able to result in an operating profit of KRW163 billion which increased by 73% quarter-on-quarter.

Operating margin was 3% and EBITDA margin stood at 17%. As we have structurally managed the foreign currency risk from a long term perspective, the negative impact from the operating result is offset by the valuation gain coming from US dollar currency denominated debt. Through this structural hedging strategy our bottom line was improved immediately during the second quarter. Pre-tax profit was KRW293 billion and net profit was KRW256 billion.

Moving on to slide four, looking at our financial positions and ratios. At the end of the second quarter total asset was KRW21 trillion, liability KRW10 trillion and equity KRW11 trillion. Cash and cash equivalents increased by KRW222 billion, resulting in KRW2.2 trillion. Inventory reduced to below KRW2 trillion.

Looking at our balance sheet, overall balance sheet has improved during the second quarter. Liability to equity ratio and current ratio improved, compared to the end of first quarter, recording 96% and 106% respectively. Net debt to equity ratio increased 5 percentage points quarter-on-quarter and it was mainly due to the debt increase for our China fab preparation, recording 21%.

Moving on to slide five, looking at our cash flow. Cash at the beginning of the last quarter was KRW2 trillion. Cash flow from operating activities resulted in cash inflow of KRW72 billion, and cash flow from investing activities resulted in an outflow of KRW720 billion. After the cash inflow from financing activities, as a result the net change in cash was an inflow of KRW222 billion, resulting in cash at the end of the quarter recording KRW2.2 trillion.

Moving on to slide six, I would like to go over our performance highlights. Our shipment increased by 12% quarter-on-quarter resulting in 9.4 million square meters, mainly driven by seasonal demand increase and size migration towards bigger display trend. As for pricing, we have witnessed the pricing for some panel sizing (inaudible) TV to increase continuously during the quarter due to the capacity constraint resulting from the panel makers [changing] to more profitable, larger sized TVs. But due to the increase of larger sized panels we have relatively lower ASP per square meter. Our blended ASP per square meter declined by 2% quarter-on-quarter to $615.

Moving on to our product mix on slide seven. Our TV business was 42% of our revenues, followed by monitors 21%, mobile applications 16%, notebook 12% and tablet 9%. The (inaudible) portion of TV and monitors increased by 1% each quarter-on-quarter due to their growing demand for ultra-high definition products, larger sized TV and IPS monitors.

Moving on to slide eight and looking at our capacity. Our producible capacity in second quarter increased by 6% quarter-on-quarter to 11.3 million square meters. It was mainly due to the (inaudible) ramp up of China facility during the second quarter.

Next we turn to our outlook section. For the third quarter, we expect a total area shipment in square meters to grow by mid-single digit percentages potentially, due to the growing demand for larger size TV and ultra-high definition TV to continue, as well as new product line, as is anticipated in the small and medium segment, entering into high season. As for pricing we might witness some ups and downs, depending on each size supply demand situation resulting from the panel makers [mix] to more larger sized TV, higher value added products. Thus overall, favorable ASP trend is expected to continue during the third quarter. Under this kind of favorable ASP trend and higher blended ASP, sequentially, we are expecting double digit revenue growth sequentially and mid-single digit [area] shipment growth.

In conclusion, thanks to area growth driven by bigger size migration in most applications and continuing a favorable price trend, we expect the [price] profits to increase in the third quarter compared to second quarter. But, we have to watch fluctuating FX movement and the [sell-through] demand and the related inventory status in most applications as a risk factor for our stated quarter earnings. This ends our presentation for second quarter and 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 our Q&A session will begin. (Operator Instructions). The first question will be provided by Jong-woo Yoo from Korea Investment & Securities. Please go ahead sir.

Hi, thank you for taking my question, actually I have two questions. First one is about profitability of the mobile and tablet (inaudible) panel in the first half. I remember that the CFO made comments on each application's profitability level in the first quarter earnings conference. If I remember correctly, TV panel had the highest profitability while the mobile application had the lowest in the first quarter due to slow seasonality. Could you tell us about the profitability of each application in the second quarter and any improvement in mobile applications? Also, how significantly can mobile applications profitability improve with volume increase in the second half?

Second question is about your guidance for the next quarter. Your shipment guidance of [mid to single] digit increase for third quarter seems to be a little bit conservative. Considering your capacity growth in China fab, around a high single digit increase seems to be more reasonable. Could you please comment on that? Thank you.

Thank you for your question. The answer for your first question is a bit complicated. We cannot deliver each [business] profit margin. But in our cases in the second quarter our average operating profit margin was 3%. As you highlighted, our TV (technical difficulty) segment. That margin was higher than our average margin, while our small to medium size, that is mobile and tablet, their margin was very tough during first quarter and second quarter as well. But this kind of trend is expected to be a bit changed in the second half, especially small and medium size margin is expected to be improved going forward in the second half thanks to the shipment increase. That's our answers for the first question.

Your second question, our shipment guidance versus our capacity growth, as you've already seen in our presentation material, our second quarter capacity growth was already 6%. That was a bit -- reflected of our China facility ramp up. In second quarter our China ramp up capacity growth is a bit reflected, and also additional ramp up impact for third quarter, we are expecting our capacity growth should be mid-single digit or a bit higher. That's why our guidance for the shipment is mid-single digit. But thus our utilization ratio, under the capacity growth in third quarter, is expected to be almost full in third quarter.

Okay thank you.

Currently there are no participants with questions. (Operator Instructions). The following question will be presented by Nam Hyung Kim from Arete Research. Please go ahead sir.

Thank you for taking my question. I have a question on TV and market demand. Looking at TV and the market, naturally TV market growth seems not as strong as trend or market recovery so far. Do you see any risk from TV demand decline, especially after World Cup event, in the second half? I still see some market in China [to be] tough, so what are end market demand and also if you can address the inventory situation in channel that would be appreciated.

Okay I explain the TV demand side, is -- actually TV demand (inaudible) related but this is very limited and mid-single or low single. We have the focus in area [base] in the growth. So area base in growth is high-single. Then at the moment the market itself is not bad compared to our expectation. Also then channel inventory and the [debt] makers inventories are quite [hedged] against the last year. For example, if the debt makers is [KRW0.5 billion], inventory level [that depends on it] is a similar -- different from seasonality. So at the moment the channel inventory level is -- normal level is -- healthy level is six weeks, something like that. Debt makers -- inventory level, quite healthy level is four to six weeks. At the moment the channel inventory and debt inventory level is quite in line with a healthier level.

Okay, thank you. If I can ask one more question, on OLED TV what's your expectation of a loss coming from OLED TV if there is a -- until you reach some scale by the end of 2015, I think LGD may incur (inaudible) loss here. Then if you can update your capacity plan for Gen-8 line for OLED second half this year and 2015, that would be helpful.

In terms of our expense, yes our OLED expense is a big [part], however we don't think it is expense issue in this kind of investment for the preparation of the future. Please understand we cannot directly mention about our loss amount of OLED side. Anyway, it is very [overstated] for the OLED production and promotion and our (inaudible) ratio is relatively low because of -- it is very (technical difficulty). So it's not that easy to make money, that's the current situation.

However, going forward we will continue to improve our (inaudible) ratio and also we will increase our capacity in (inaudible) as well. So combined with this kind of capacity increase and volume scale together with the [LD] improvement we believe our loss making from the OLED side should continue to decline. Thus, we try to enjoy another playground to compete in this kind of tough display market. So for the capacity for OLED we will expand our capacity in [Q4]. Additionally, in terms of the [production] capacity, it is expected to be 26K together with the existing 8K. However, the oxide possibility will not be that high because we have to consider the LCD, a larger size demand. So oxide conversion should be limited to (technical difficulty). Is it okay for your question?

Okay, thank you very much.

The following question will be presented by (inaudible) from (inaudible). Please go ahead, sir.

Hi, thanks for taking the questions. I have two questions. The first is on high resolution TV panels. I'm just wondering what is the current portion of the high resolution TV panels within our shipment and what do we think this number would be by second half, especially towards fourth quarter?

Yes a lot of our new HD TV shipments this month -- for first half of this year are -- our portion is less than 10%, but second half, we will expand that to more than 10%. So probably at end of this year we expect it will be middle double digit.

Sorry, just to clarify, middle double digit means 15%?

Yes, hopefully yes.

Okay, thank you. My second question is on small to medium size panels. Given that the third quarter EBIT growth we're expecting to see mid-single digit range, does this mean that the fourth quarter momentum would still be upwards, especially on small to medium size panels?

Upward momentum for third quarter or fourth quarter? [Overall] question is --

Fourth quarter.

Fourth quarter? Yes we are also expecting fourth quarter -- fourth quarter should be better than third quarter, although we have a constraint of capacity. Actually capacity, consumption for the small size is very small. We are expecting better shipment growth quarter by quarter.

Thank you.

Eric Lin, CIMB.

Thanks for taking my questions. I've got quick questions. Number one, it's -- on the variable cost [label] if on a square meter basis, I think second quarter, the variable cost did not come down. So should we -- I just want to know why is that and when we move on to second half, that increase in shipment in small medium size panel, together with the higher resolution (inaudible) TV panel, the change of product mix will increase ASP further. Should we assume the variable cost will also go up? That will be my first question.

Your first question, if my understanding [is] correct, your first question is, our second quarter variable cost should drive but actually variable cost is not that --

In the cash cost, the cash cost.

Our cash cost, cash cost.

Cash cost per square meter, yes.

Cash cost per square meters. Actually, that is mainly due to our mix issue and also as we highlighted, because of the China facility preparation, we have to record this cost as well as cash cost. Preparation of the China facility, we have to hire employee and also we have to learning cost -- learning [cover] and learning cost to improve our first two China facility. These also are one of the reasons.

Can you separate the impact of those two factors? Number one is product mix, number two is China fab ramping up? For the product mix alone, should we assume that product mix trend in second half will also increase the cash cost per square meter?

Actually for now I don't have the data at this point. We will get back to you on that at the earnings conference call. Then your second question, our shipment trend is based on applications for the third quarter. Actually TV and IT segmentation, our shipment growth -- in case of TV and mobile and tablet, our shipment growth should be higher than our guidance. In case of small and medium size, the shipment growth should be double digits. So TV [size] should be high single digits.

In case of IT segment, our area shipment [growth] should be declined despite the stronger market demand situation that's because of our capacity conversion into mobile division.

That's for third quarter, right?

Yes, that's third quarter.

Great, thanks a lot.

Currently there are no participants with questions. (Operator Instructions). The following question will be presented by (inaudible) from [Thomson Securities]. Please go ahead, sir.

Thank you. Could you please talk about your planned capacity ramp for flexible displays? Has any decision been made about the Gen 6 facility?

There are lots of noise, it's very confusing. Your question is related to flexible display capacity, is that right?

Yes, it is.

Yes. Our capacity for the flexible display was 6K based on Gen 4.5 generation. We are expecting this kind of capacity is doubled in second quarter this year -- second half of this year.

Thank you and any decision made about the Gen 6 facility?

Gen 6 facility convergence for the flexibility, this not decided yet. Actually, depending on the market in that situation and customers in that situation together with the wider application expansion, these should be our critical point for decision-making.

Thank you very much.

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

Operator, if there's no questions to wait, we will end this presentation and conference call.

On behalf of --

There is one participant with a question.

Okay, yes.

Eric Lin, CIMB. Please go ahead, sir.

Heeyeon, just one follow up question on the UD TV. So I understand that you are promoting a very cost or price competitive UD TV in the marketplace. So what would be the price gap to full HD panel on a like for like base?

Okay, this amount actually the premium for the UHD TV (inaudible) probably a high-end product from the 30% to 20%, and for the (inaudible) is around 10% to 20%. Our current price is actually the -- following the same price premium. (Inaudible) add up the information, depends on the region by region is different. China market is -- UHD premium (inaudible) to 40%, but clearly the USA market and Europe market average is two times higher than (inaudible) premium. So in terms of the region, region by region is [different] premium, yes.

Okay so what you mentioned, is for panel the price gap is about 1.2 times to 1.3 times, but [was] said, could be 1.4 times in China and two times in western countries, right?

Right.

Okay, so should I assume that for the UD TV panel, you will have a better margin compared to full HD?

Definitely.

Okay, thanks a lot. That's all from me. Thank you.

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

Operator, if there is no question, we will end this conference call. On behalf of LG Display, we thank you for participating in our web conference call. Should you have further questions, please contact either myself or my colleagues. Thank you.